Truss U-turn on corporation tax will make recession worse, economists warn

Britain will be thrust into a deeper recession by Liz Truss’ corporate tax U-turn and turmoil in the mini-budget market, economists have warned, as the city braces for deeper swings savages of the pound and bonds.

Goldman Sachs slashed its UK growth forecast on ‘significantly’ worse lending terms and Ms Truss on Friday scrapped plans to cancel next April’s 19 corporation tax hike % to 25%.

He expects a deeper recession than initially forecast and a 1% contraction in the economy next year, a downward revision from his previous forecast of a 0.4% drop in GDP. . Goldman expects a rebound in 2024.

However, Goldman economists said the government’s U-turn will put less pressure on the Bank of England to aggressively tackle inflation with rapid interest rate hikes. Economist Ibrahim Quadri said the weaker growth and inflation outlook will mean the Bank can avoid a significant one-percentage-point increase in upcoming meetings, easing the mortgage misery facing millions of people. households.

There were tentative signs of the pound stabilizing in Asian markets last night as City analysts warned this week will be a key test of investor sentiment.

The pound rose 0.8pc against the dollar in tight trade to rebound above $1.12 after Mr Hunt signaled a return to a more cautious approach on the fiscal front. It climbed 0.8pc against the euro to €1.1585, an early sign that the reversal of Ms Truss and the new chancellor is starting to calm the markets.

Mr Hunt promised on Sunday he would make tough decisions in a bid to reassure markets following the chaos caused by his predecessor outlining £43billion in unfunded tax cuts. However, greater market volatility could be caused by ongoing unrest in Westminster and the Bank of England ending its support for pension bond purchases on Friday.

Lee Hardman, Currency Analyst at MUFG, said: “I expect it to be another volatile week. Obviously Monday is going to be a big test, primarily I think for the gilt market.

He said Mr Hunt had a ‘different way of thinking’ than Kwasi Kwarteng, but warned there could be further selling of sterling in the coming weeks ahead of the budget statement from Mr. Hunt on October 31.

“What happens in the markets is that once you lose confidence, it’s much harder to get it back.”

Jane Foley, head of currency strategy at Rabobank, said: “Over the next few days it will become more apparent whether the Prime Minister’s U-turns and the Bank of England’s intervention have provided sufficient reassurance to investors.

“We continue to see tough times ahead for the pound.”