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UK's EU exit does not end uncertainty: Fitch Ratings

Feb '20
Pic: Shutterstock
Pic: Shutterstock
The effect of post-Brexit developments in the United Kingdom (UK)-European Union (EU) relationship on the former’s economy and public finances will remain an important factor in its UK sovereign rating assessment after the United Kingdom left the EU on 31 January, Fitch Ratings said recently. The UK's formal departure has no immediate rating impact.

The Conservative Party's decisive victory in the UK general election on 12 December greatly reduced near-term risk of a 'no-deal' Brexit and Fitch affirmed the UK's 'AA' rating on 17 December and removed it from Rating Watch Negative (RWN).

The negative outlook on the UK's rating reflects uncertainties over the relationship. Persistent Brexit uncertainty has already weighed on growth. Recent survey data, including a jump in manufacturing optimism, suggest some benefit from reduced political uncertainty and the US-China 'Phase One' trade deal. But a rapid rebound in business investment is unlikely while the UK and EU seek to hammer out a free-trade agreement.

Fitch forecasts an annual growth of 1.3 per cent in 2020, unchanged from last year. It foresees growth accelerating to 1.8 per cent in 2021 as pent-up investment demand is released, assuming no cliff-edge.

Its forecasts also reflect the prospect of a looser fiscal stance. The Conservatives' new fiscal rules would allow an extra £22 billion of public sector net investment annually and the government has emphasised its desire to 'level up' UK economic performance across regions by improving transport infrastructure. This increases uncertainty around Fitch’s government debt projections, which see debt on a gentle downward path.

The sharp reduction in the general UK government deficit (from 8.2 per cent of gross domestic product in 2015 to an estimated 2.3 per cent in 2019) has created some space to ease fiscal policy. The budget due on 11 March will be an important indicator of how this space will be used and how far stimulus will lift growth.

Fitch’s next scheduled review of the UK's sovereign rating is due on 27 March.

Fibre2Fashion News Desk (DS)

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