Goldman Sachs analysts have downgraded Britain's economic outlook after Prime Minister Liz Truss removed Kwasi Kwarteng as chancellor and reversed a freeze in corporation tax, Bloomberg News reported on Sunday, October 16.

"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," Goldman analysts led by Sven Jari Stehn said in a note dated Sunday,

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Goldman revised its 2023 UK economic output forecast to a 1 percent contraction from an earlier forecast for a 0.4 percent output drop, with core inflation seen at 3.1 percent at the end of 2023, down from 3.3 percent previously, Bloomberg said.

On October 14, Truss said Britain will go ahead with corporation tax rise to 25 percent next year, making an U-turn on a pledge to freeze it at 19 percent .

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

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

"The persistence of core inflation and the continued tightness in the labour market suggests that the BoE still needs to take monetary policy into significantly contractionary territory," the Goldman analysts wrote.

"That said, following PM Truss's policy reversal we think there is less pressure for the BoE to act aggressively in the coming meetings," they added.

First Published:Oct 16, 2022 7:29 PM IST