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Goldman Sachs sees deeper UK recession after tax U-turn

Oct 17 (Reuters) – Goldman Sachs has downgraded Britain’s economic outlook and warned of a deeper recession next year after Prime Minister Liz Truss last week removed Kwasi Kwarteng as chancellor and scrapped parts of her unpopular economic package.

The Wall Street bank revised its 2023 UK economic output forecast down 1[ads1]% from a previous forecast of a 0.4% output drop, with core inflation at 3.1% by the end of 2023, down from 3.3% previously .

“Throwing in weaker growth momentum, significantly tighter financial conditions and the higher corporation tax from next April, we further downgrade our UK growth outlook and now expect a more substantial recession,” Goldman analysts led by Sven Jari Stehn said in a note dated Sunday. .

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With financial markets in turmoil, Truss said on Friday that Britain would go ahead with a corporation tax increase to 25% next year, reversing a pledge to freeze it at 19% after the UK economy also unexpectedly shrank in August.

Goldman Sachs hinted at possible further policy reversals in the coming days, but said it was less likely that the energy price guarantee program would be revised since it was needed to protect household bills in the winter.

It also sees less pressure on the Bank of England (BoE) to tighten aggressively and lowered its estimate for the terminal bank rate to 4.75% from 5%, forecasting 75 basis point hikes in November and December from the central bank.

“Persistent core inflation and continued labor market tightness suggest the BoE still needs to take monetary policy into significantly tightening territory,” the Goldman analysts wrote.

“That said, following Prime Minister Truss’s policy reversal, we believe there is less pressure for the BoE to act aggressively in the coming meetings,” they added.

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Reporting by Jahnavi Nidumolu and Subhadeep Chakravarty in Bengaluru; Editing by Tomasz Janowski and Shailesh Kuber

Our standards: Thomson Reuters Trust Principles.

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