(Bloomberg) -- The turmoil striking the banking sector will add to a long list of headwinds causing the UK economy to flatline in 2023, Goldman Sachs has warned, as the crisis threatens to curtail lending.

The US bank expects the turbulence caused by crises at Silicon Valley Bank and Credit Suisse to shave 0.4% to 0.6% off UK gross domestic product growth as banks rein in lending and financial conditions rapidly tighten.

The UK is already flirting with recession as the cost of living crisis, political instability and higher interest rates weigh on demand. Goldman warned that the economic blow from the banking sector will be bigger in the UK than in the euro zone. 

But the investment bank expects this to be partly offset by the more expansionary fiscal plans announced last week by Chancellor of the Exchequer Jeremy Hunt. Combining the budget and banking impacts, Goldman now expects a 0.2% GDP hit compared to previous projections, meaning growth flatlines this year.

Goldman’s economists said in a note that the main drag on economic activity will come from “a tightening in bank lending, which is already contracting in response to higher policy rates.”

“We find that the recent drop in bank stocks, rise in financials spreads, and increase in uncertainty might tighten bank lending standards by around 10 percentage points both in the Euro area and the UK,” Goldman said.

This would be “significant” but still well below the tightening in the financial crisis and euro zone debt crisis, it added.

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