Economists Forecast UK Recession to be Nearly as Severe as Russia's

Economists anticipate that the economic downturn in the United Kingdom in 2023 will be nearly as severe as that of Russia, due to a significant decrease in the standard of living for households that will have a negative effect on the economy.

Goldman Sachs has predicted a 1.2% decrease in the U.K.'s real GDP in 2023, which is lower than the other G-10 countries. The lender expects a 0.9% growth in 2024.

According to Goldman's projections, Britain is only slightly ahead of Russia in terms of economic growth. Russia is expected to experience a 1.3% decrease in 2023 due to its involvement in the Ukraine conflict and the economic sanctions imposed by Western countries. However, the bank predicts that Russia will experience a 1.8% growth in 2024.

According to the Wall Street giant, the United States is predicted to experience a 1% growth in 2023 and 1.6% in 2024. Germany, which is one of the weakest economies after Russia and the U.K., is anticipated to have a 0.6% decline this year, followed by a 1.4% growth in the following year.

Goldman's predictions for the U.K. are lower than the market consensus, which estimates a 0.5% decrease in 2023 and a 1.1% increase in 2024. The OECD has also predicted that the U.K. will be behind other developed countries in the upcoming years, even though they are facing the same macroeconomic issues. This puts London's performance closer to Russia than to the other G-7 nations.

Jan Hatzius, Chief Economist at Goldman, and his team have determined that both the euro area and the U.K. are already in recession due to the significant and prolonged rise in household energy costs, which will cause inflation to be higher than in other areas.

The effects of high inflation are expected to have a negative impact on real income, consumption, and industrial production. Analysts predict a decrease in real income of 1.5% in the euro area until the first quarter of 2023 and 3% in the U.K. until the second quarter of 2023, with a possible recovery in the second half of the year.

The United Kingdom's Office for Budget Responsibility has predicted that the nation is going to experience its most significant decrease in living standards in history. In November, when Finance Minister Jeremy Hunt presented the budget, the OBR estimated that real household disposable income, which is a measure of living standards, will drop by 4.3% in 2022-23.

KPMG, a consultancy firm, has predicted that the U.K.'s real GDP will experience a decrease of 1.3% in 2023, due to a prolonged recession that is not particularly severe. They anticipate a slight 0.2% recovery in 2024.

The decrease in incomes was identified as the primary cause of the issue, as higher inflation and interest rates significantly reduce the amount of money households have to spend. The Bank of England increased rates by 50 basis points to 3.5% in December, in an effort to control inflation, which slightly decreased last month from the 41-year high it had reached in November.

KPMG anticipates that the central bank will raise the bank rate to 4% in the initial quarter of 2021, and then take a "wait-and-see" stance as inflation gradually decreases.

KPMG economists predicted in a December outlook report that the labor market will begin to decline in the first half of 2023, with the unemployment rate reaching 5.6% by mid-2024. This would represent an increase of approximately 680,000 people.

Yael Selfin, the chief economist at KPMG U.K., noted that the increase in food and energy costs, as well as the general rise in inflation, had already diminished the purchasing power of households.

An increase in interest rates has created another obstacle to economic growth. Lower-income households are particularly vulnerable to the current cost increases, as the items they are most likely to purchase are necessities that cannot be easily replaced in the short term, according to Selfin's report.

It is predicted that households will reduce their spending on non-essential items in 2023 due to the decrease in income. Consumers are likely to cut back on their spending in areas such as dining out and entertainment, particularly those households that have been most impacted by the increase in energy and food prices.

The U.K. is facing a multitude of issues, both global and domestic, that are hindering its progress. On the global front, the war in Ukraine and the supply bottlenecks caused by China's Covid-19 measures are creating headwinds. Additionally, the U.K. is dealing with the aftermath of the pandemic. Domestically, the country is facing a long-term sickness crisis that has caused a tightening of the labor market. Furthermore, Brexit has caused a significant decrease in trade.

At first, commodities were the main cause of the inflation spike, but Goldman Sachs' chief economist Jan Hatzius noted that price increases have become more widespread in both the euro area and the U.K. due to higher than expected inflation.

The United Kingdom is currently experiencing the most widespread core price pressures among the G10 countries, due to a combination of energy issues similar to those in continental Europe and a labor market that is too hot, like in the United States.