On Sunday, Bloomberg News reported that Goldman Sachs (NYSE:GS) analysts had downgraded Britain’s economic outlook after embattled British Prime Minister Liz Truss removed Kwasi Kwarteng as her Treasury chief and reversed a previous decision on tax cuts.
According to Wall Street’s top investment firm, “weaker growth momentum, significantly tighter financial conditions, and the higher corporation tax” taking effect next April, will likely lead to a “more significant recession” than previously thought.
Goldman also revised its forecast for UK economic output in FY 2023 from a 0.4% drop to a 1% contraction. However, Goldman’s analysts said the government’s U-turn will relieve some pressure on the Bank of England to rapidly tackle inflation with interest rate rises. As a result, core inflation is now expected to come in lower than previously thought, at 3.1% instead of 3.3%.
After weeks of instability in the stock market, Truss on Friday (Oct. 14) announced that Britain would be raising its corporation tax to 25% next year, a change from the previous plan freezing it at 19%.
On Sept. 23, Kwarteng said that corporation tax would be frozen at 19%, undoing the plans of his predecessor. Along with this decision came a number of other unfunded tax cuts which have caused financial markets to become unstable.
This week, officials and industry analysts will be keeping a close eye on financial markets for signs of stability. The Square Mile has warned that there may be more volatility in sterling and UK bonds this week.
Lee Hardman, a currency analyst at MUFG, stated that there might be more sell-offs for sterling in the next few weeks prior to the new Treasury chief’s fiscal statement on October 31.
“What happens in markets is once you lose confidence, it’s a lot harder to get it back,” Hardman said.
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