Fitch has downgraded the UK’s credit rating to AA- from AA, citing the budget impact of the coronavirus pandemic and continued uncertainty over Brexit.
The rating agency forecast the UK’s economic output would drop nearly 4 per cent this year due to the outbreak-related downturn, but said its analysts had grown concerned about Britain’s “fiscal loosening stance” even before the government announced its fiscal plan to tackle the crisis.
“The downgrade reflects a significant weakening of the UK’s public finances caused by the impact of the Covid-19 outbreak and a fiscal loosening stance that was instigated before the scale of the crisis became apparent,” Fitch said.
The rating agency, which also put the UK on a “negative outlook”, added that it also took into account “the deep near-term damage to the UK economy caused by the coronavirus outbreak and the lingering uncertainty regarding the post-Brexit UK-EU trade relationship”.
Rishi Sunak, the chancellor, has unveiled £60bn in new spending to tackle the crisis, spending that will send UK public finances deeply into the red. Fitch expects UK government debt to increase to 9 per cent of gross domestic product next year, from 2.1 per cent in 2019.
Fitch estimated growth next year will bounce back to 3 per cent if the UK can begin to unwind the measures to tackle the health crisis in the second half of the year. The UK’s Coronavirus Job Retention scheme, a three-month programme to support employees hit by the pandemic, will cost about 1.3 per cent of GDP, according to Fitch estimates.
“The UK’s public finances were already set to weaken following the stimulus measures announced in the budget on 11 March, and they are now set to deteriorate more rapidly,” Fitch said. The fiscal impact “will depend on the severity and length of the lockdown and the sustainability of any progress in coronavirus containment.”