Citing Brexit and increased fiscal spending, Moody's said it may be forced to downgrade the UK's credit rating.
The UK’s credit rating may be downgraded, Moody’s has warned, owing in part to spending pledges made by all of the major parties ahead of the general election on 12 December.
The credit rating agency has said it is considering revising downward its rating of UK credit, citing fears of Brexit and increased government spending.
In a statement, Moody’s warned that "increasing inertia and, at times, paralysis that has characterised the Brexit-era policymaking process" showed an "erosion in institutional strength".
This paralysis, they argued, would likely extend beyond Brexit. They noted: “It would be optimistic to assume that the previously cohesive, predictable approach to legislation and policymaking in the UK will return once Brexit is no longer a contentious issue, however that is achieved.”
The credit rating agency also cited the risk of increased spending, noting “in the current political climate, Moody’s sees no meaningful pressure for debt-reducing fiscal policies”.
Whichever party wins the election, Moody’s warned, there is “widespread political pressures for higher expenditures with no clear plan to increase revenues to finance this spending”.
As a result, the rating agency said that its outlook for UK credit had been downgraded from stable to negative, meaning that the UK’s current rating of Aa2 could be under threat.
Aa2 is the third level and still considered broadly safe. Other major economies with the same rating include France, the UAE, South Korea and Hong Kong.
Other major developed economies such as Australia, United States, Germany, Denmark and Sweden have the top rating.
A downgrade would see the UK put in the Aa3 category, alongside Chile, Taiwan, the Czech Republic and Belgium.
The UK has seen its credit rating downgraded twice over the past six years, first in 2013 when it lost its top-notch AAA rating and again in 2017.
According to Andreas Billmeier, sovereign research analyst at Legg Mason affiliate Western Asset Management Company, the threat of downgrade is simply Moody’s catching up with other rating agencies.
He notes: “Moody’s argue that Brexit-era uncertainty is characterized by “inertia and, at time, paralysis” and views the debt burden, in conjunction with spending plans as spelled out by major parties, increasingly as a significant vulnerability.
“We view this as Moody’s essentially catching up with other rating agencies and analysts. A fiscal deterioration is highly likely in almost every potential political scenario going into 2020.”
However, according to Paul Donovan, global chief economist for UBS, the threat is not being given much attention by markets. He summarises: “A credit rating agencies' threat to downgrade the UK from something to something else is being largely ignored.”
On a seperate but related note, new data shows that the UK has managed to avoid a technical recession, experiencing growth of 0.3% in in the third quarter.
Having contracted in the second quarter, a further contraction in the third quarter would have seen the UK technically enter a recession.
That, however, may not be reason to celebrate. David Scammell, fixed income & macro strategist at Brown Shipley argues: “Whilst avoiding a second straight quarter of contraction, and the stigma of a ‘technical recession’, the underlying tone of the latest report is weak and suggests that there is little growth momentum as we head into the final months of the year.”
Similarly, Helal Miah investment research analyst at The Share Centre, points out that “the numbers don’t make pleasant reading as the figure was shy of expectations and the year on year figure was a weak 1% compared to 1.3% last time around.”
According to Billmeier: “Going forward, the trajectory of GDP and the probability of a recession in 2020 depend critically on the outcome of the 12 December elections of course, but also, assuming Brexit does indeed take place, on the future relationship between the UK and its major trading partner, the EU, which is still to be negotiated.”