Fitch has affirmed the UK’s coveted credit rating for now, but has maintained the country on a ‘negative outlook’ and expects it will remain so until at least 2014.
The nation’s spiraling budget deficit is partly to blame for this outlook, Fitch said.
“The agency believes the UK’s high-income, flexible and diversified economy, robust institutions, and high degree of political and social stability support the ‘AAA’ rating.
However, weaker than expected growth and fiscal outturns in 2012 have increased pressure on the UK rating, resulting in a negative outlook since March 2012.
“With a structural budget deficit second in size within the ‘AAA’ category only to the US (‘AAA’/Negative), and general government gross debt approaching 100% of GDP in 2015-2016 – the upper limit of the level consistent with the UK retaining its ‘AAA’ status – the likelihood of a downgrade has therefore increased.”
Fitch added it is concerned the global economic backdrop, especially the ongoing eurozone crisis, will act as a drag on UK growth.
The agency now expects the UK economy to contract by 0.3% in 2012, compared to a previous forecast of 0.8% growth when the UK’s sovereign rating was last reviewed in March.
“The weaker than anticipated economy is reflected in lower corporate tax returns and higher public sector net borrowing, which in the five months to August was £59bn compared to £48.4bn over the same period in 2011. In light of these developments, Fitch has updated and revised its medium-term fiscal projections for the UK.
“Fitch expects only a weak recovery beginning in 2013 and output is not expected to surpass its 2007 pre-crisis peak until 2014.
“However, the relative resilience of the labour market underscores the continuing uncertainty regarding the medium-term growth potential of the UK economy.” Its prediction of an annual growth rate of 2.25% for the UK remains unchanged.”
Last week official figures offered a rare bright spot in economic data, as UK GDP growth was revised slightly upwards to a contraction of 0.4% in Q2, according to the final estimate from the Office for National Statistics.
This was in line with economists’ expectations and compares with an original estimate of a 0.7% contraction and a second estimate of a 0.5% tightening.
The UK remains in the midst of a double-dip recession after the economy contracted by 0.3% in Q1 2012 and 0.4% in the final quarter of 2011.
