UK credit rating ‘under pressure’ amid uncertainty on Brexit talks
12 July 2017
Britain's creditworthiness is "under pressure" due to uncertainty over the result of Brexit negotiations, one of the world's leading rating agencies has warned.
Moody's said it remained unclear whether the Government would be able to deliver a "reasonably good outcome" from Brexit, and warned that growth prospects over the medium term will be "materially weaker" if it fails to secure good access to the single market after withdrawal from the EU.
While the "base case scenario" remains that the UK and EU will forge a free trade agreement, the chances of an "abrupt and damaging" exit under World Trade Organisation rules has increased as a result of the Government pursuing a hard Brexit, said the agency's annual report on the UK.
Moody's warned that the British economy is likely to weaken "significantly" over the remainder of 2017, with GDP growth forecast to fall from 1.8% in 2016 to 1.5% this year and 1% in 2018, due to falling demand from household consumption and "persistently weak capital formation".
Political and fiscal risks have heightened as a result of the loss of Theresa May’s parliamentary majority in the snap election, which led the Government to drop a number of cash-saving proposals and resulted in “significant” pressure for increased public spending.
The UK’s sovereign rating of Aa1 negative – reduced from stable following last year’s EU referendum – could be downgraded further if the progress of Brexit negotiations suggested the Government might not be able to preserve core elements of single market access, said Moody’s.
However, a trade agreement limiting the economic fallout from Brexit could see it revised back up to stable.
“While the negotiations with the EU have recently started, it remains unclear whether the UK Government can eventually deliver a reasonably good outcome for the UK,” said Moody’s senior vice president Kathrin Muehlbronner, the author of the report.
“The likelihood of an abrupt – and damaging – exit with no agreement and reversion to WTO trading rules has increased compared to our expectation directly after the referendum, with the Government so far pursuing objectives that imply a ‘hard’ exit.”