Britain’s credit rating downgraded by Moody’s on concerns about weak growth
Moody’s Investors Service yesterday cut the UK’s credit ratings as the world’s sixth-largest economy struggles amid Brexit uncertainty and a rising number of coronavirus cases.
The ratings agency downgraded long-term issuer and senior unsecured ratings to “Aa3” from “Aa2” due to growth concerns, diminished fiscal strength and a weakening of its institutions and governance.
“The coronavirus- induced shock has brought new and considerable pressures on the UK economy,” Moody’s said. “Despite the projected recovery, we estimate a sharper peak-to-trough contraction for the UK than for any other G20 economy because of the relatively greater severity of the coronavirus outbreak, the reliance of the UK economy on service activities [that] involve greater levels of human interaction and the continued risk of further outbreaks and localised restrictions.”
The pandemic hit Britain hard and caused its economy to shrink by about a fifth in the first half of this year, the biggest contraction on record, according to the Office for National Statistics.
Meanwhile, the unemployment rate rose to 4.5 per cent in the three months to August, its highest in more than three years despite the government’s £190 billion ($247.86bn) package of support and comprehensive plan to protect jobs.
The UK’s economy is set to shrink by 9.8 per cent, a notch down from a previous forecast of a 10.2 per cent contraction, according to the International Monetary Fund’s latest World Economic Outlook report.
The UK, which left the EU in January and is in a transition period, is locked in complex negotiations to keep €1 trillion worth of annual trade free of tariffs or quotas from next year.
However, talks have stalled as UK Prime Minister Boris Johnson seeks a trade deal similar to the one secured by Canada, with a few tariffs on goods.
That has proved difficult to agree on with EU leaders, leading to a possibility of a no-deal Brexit that could render all previous trade agreements void.
Moody’s said that the uncertainty surrounding Brexit could further hamper any recovery in the country during the second half of this year.
“The structural impact of the coronavirus-induced shock will be uncertain for some time, but in view of the impact on investment and the labour market to date, some permanent scarring on the economy appears likely.”
Moody’s, which previously had a negative outlook on the UK, said it had changed the outlook to stable.
“The stable outlook reflects Moody’s view that the upside and downside risks are balanced, at least over the coming 12 to 18 months. The UK’s intrinsic economic and institutional strengths, as well as the likely level where debt will stabilise, compare well to peers at the ‘Aa3’ rating level,” the credit rating agency said.
Covid-19 hit Britain hard and caused its economy to shrink by about a fifth in the first half of this year