Goldman: "UK Economic Recession to Worsen Next Year... Tax Cut U-Turn Will Cause It"

[Asia Economy Reporter Yujin Cho] Goldman Sachs has downgraded its forecast for the UK's economic growth rate next year. With the so-called 'Trussonomics' plan to revive the economy through tax cuts focused on corporations and the wealthy effectively abandoned, market concerns about the UK economy are growing.

According to The Guardian and others on the 16th (local time), Goldman Sachs lowered its forecast for the UK's economic growth rate next year from -0.4% to -1%. The core inflation forecast for the end of next year was also revised down from 3.3% to 3.1%.

Goldman Sachs cited the Truss Cabinet's withdrawal of the corporate tax cut measure as a major risk factor for the UK's economic recession.

Initially, Prime Minister Liz Truss announced that she would scrap the plan by her predecessor Boris Johnson to raise the corporate tax rate from 19% to 25% starting in 2023, but she reversed this decision on the 14th.

This is the second policy U-turn following the withdrawal last month of the plan to lower the top income tax rate from 45% to 40%, which was known as a tax cut for the wealthy.

The Truss Cabinet, after launching a ?45 billion tax cut plan called the 'mini-budget' immediately after taking office, faced growing market instability as the policy ran counter to the global tightening trend. Following the withdrawal of the wealthy tax cut, it has now shifted direction to proceed with the corporate tax increase as originally planned.

The Truss Cabinet expected that implementing the tax cuts would lead to lower inflation, increased investment, and consumption, but the market's expectations for a peak in inflation remain low.

The report stated, "Considering the weakening growth momentum, worsening fiscal conditions, and the corporate tax increase in April next year, we are downgrading the UK's economic growth forecast for next year," adding, "A more severe recession is expected next year."

The report also assessed that with the revision of the tax cuts, the Bank of England (BOE) is less likely to aggressively tighten monetary policy.

Experts have lowered their previous forecast that the BOE would raise the base interest rate to 5% to 4.75%.

Goldman Sachs, Deutsche Bank, and Barclays expect the BOE to raise the base interest rate by 0.75 percentage points at the monetary policy meetings held in November and December. They forecast further increases of 0.25 percentage points each in February and May next year.

Goldman Sachs cited a recent survey conducted by Deloitte targeting major UK companies, predicting that due to the impact of interest rate hikes, major UK companies will find it more difficult to cope with reduced sales and economic recession next year.

Chief financial officers of major UK companies reported that borrowing costs are at their highest level since 2010, increasing investment risks and making business conditions more difficult.

Deloitte's Chief Economist Ian Stewart said, "As the BOE has sharply raised the base interest rate so far, borrowing costs for companies have significantly increased, leading to changes in how investment funds are raised."

This content was produced with the assistance of AI translation services.