The UK is likely to enter a deeper recession than previously expected next year, while interest rates and inflation will be lower than forecast, according to revised analysis from Goldman Sachs.
The US investment bank downgraded its outlook for Britain, in analysis released on Sunday, forecasting the UK economy would shrink by 1% next year, down from its previous estimate for a 0.4% contraction.
Goldman Sachs said that the increase in corporation tax to 25% in April – after Truss U-turned on one of her key Conservative leadership campaign commitments – was one factor.
Its report said: “Folding in weaker growth momentum, significantly tighter financial conditions, and the higher corporation tax from next April, we downgrade our UK growth outlook further and now expect a more significant recession.”
Analysts said that Truss backtracking on her corporation tax plans could help to ease pressure on the Bank of England for a tougher rise in interest rates. Goldman Sachs, Deutsche Bank and Barclays said a 0.75 percentage point increase in rates to 3% was now more likely at the Bank’s next meeting in November, down from previous estimates for a rise of one percentage point made immediately after the mini-budget.
Goldman analysts believe UK interest rates will now peak at 4.75%, slighter lower than the 5% previously factored in.
A separate business survey by the accountants Deloitte found that UK companies are expecting the rise in interest rates will make it more difficult to cope with a slump in sales and recession over the next year.
Finance directors at some of Britain’s largest firms said that borrowing was more costly than at any time since 2010, making investments harder to justify.
The poll by Deloitte found that a majority of
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