Fitch forecasts recession in British economy in Q4

ISTANBUL

The British economy is expected to enter a recession in the last quarter of this year, according to global agency Fitch Ratings on Monday.

“We now expect UK GDP to decline by 1% in 2023 compared with -0.2%” in the September Global Economic Outlook due to "extreme volatility" and the "prospect of sharply higher interest rates," Fitch said in a press release.

"The jump in real interest rates sparked disfunction at the long end of the government bond market as defined-benefit pension funds faced margin calls on out-of-the money interest rate swap positions related to liability-driven investment strategies," it said.

Recalling the Bank of England's (BoE) intervention to markets by buying pounds, Fitch noted: "We now expect much more rapid rises in the policy rate as the BoE seeks to offset the impact of looser fiscal policy and a weaker currency on inflation, buttress investor confidence in sterling assets and demonstrate its independence in the face of increased financial market concerns about fiscal dominance."

Fitch predicted that the UK’s central bank will raise the policy rate from 2.25% to 4.25% by December 2022 and 5% by the second quarter of 2023.

It said: "Rising funding costs, tighter financing conditions, including for mortgage borrowers, and increased uncertainty will outweigh the impact of looser fiscal policy in 2023.

"Fitch sees the economy entering recession from 4Q22 as rapid rate rises compound the impact of the energy crisis and the contraction in the eurozone."