Credit Suisse has today warned that the UK’s recession could be worse than expected because of the recent market turmoil.
Owing to the market turmoil that has followed the announcement of the mini-budget, risks are rising that the recession in the UK is deeper than we forecast. If the market moves are sustained or worsened, they can offset the impact of the tax cuts and increase the depth of the recession through much higher mortgage costs and currency-led inflation.
The bank’s head of UK economics, Sonali Punhani, said: Real incomes could be squeezed further by 1-1.5% in 2023 if the recent market moves are sustained, which is likely to add downside risks to our growth forecast of -0.2% in 2023.
“For the moves to stabilise, the Bank of England would need to restore credibility by hiking aggressively in the near term. We expect the BoE to hike 100bps in November and raise rates to 4.5% by early 2023.
“More importantly, the markets would need to see a credible fiscal plan on October 31 to reverse these moves, in our view. We calculate that fiscal tightening of 2.5% of GDP (£60bn) in 2026-27 would likely be needed to stabilize the debt to GDP in the medium term. This is possible via a combination of a U-turn on tax cuts (being discussed and look possible) as well as spending cuts. It would be challenging to deliver the scale of these cuts, but for them to be credible, these need to be delivered sooner rather than in the latter part of the forecast.”