In yet another show of the uncertainty surrounding Brexit, Moody’s Investors Service recently cut the UK’s credit rating and blamed the move to leave the EU as one of the biggest factors.
May’s Impact
The leading credit rating company bumped the UK down one level to a rating of Aa2, the third-hugest investment grade. The rating measures a country’s ability to pay back its debt, and the UK had the top mark of an Aaa rating from the 1970s until 2013.
The move is a huge blow to Theresa May, as her weakened political position was cited as another cause for the decline. Moody’s and the other major rating companies previously downgraded the UK right after the Brexit vote last summer, but this is the first downgrade since May called for an election this year and faced an embarrassing defeat. According to Moody’s, the loss of the majority from the election has forced May to make fiscal compromises, which has only added to Moody’s previous concerns around the UK’s fiscal policy.
May’s power has undoubtedly been lessened since the election. She has moved on from a pledge to review state pensions and has agreed to increase pay for public sector workers and to spend more in Northern Ireland so that she can stay in power.
Future of Brexit
Although May continues to try to paint a positive picture for the transition out of the EU, Moody’s view is definitely less optimistic. The downgrade highlights many of the Brexit economical effects. In its report, Moody’s said the government’s plans to decrease the heavy debt load have been knocked off course by Brexit, and the debt will continue to weigh on the economy for the long term.
“Moody’s is no longer confident that the UK government will be able to secure a replacement free trade agreement with the EU, which substantially mitigates the negative economic impact of Brexit,” said Moody’s analysts in the report.
The company believes that the UK will soon face weaker public finances due to slower economic growth relating to Brexit, especially because Brexit will continue to dominate economic policy making for years to come. Moody’s noted that it is difficult to imagine the government focusing on anything else.
There are certainly risks involved with leaving behind the economic comfort of the EU, and the Moody’s report highlights those. Analysts say the UK public finance outlook has been weakened significantly in recent years, and actually leaving the EU will likely put further pressure on the economy.
Government Response
The credit rating downgrade comes at a pivotal point in Brexit negotiations and is a sign to the rest of the world that the UK might not be as strong as it claims to be. The government responded to the downgrade by saying that it isn’t complacent about the challenges ahead but noted it is optimistic about what can be done. So far, it appears the credit rating cut isn’t affecting the UK Brexit Plan.
The long-term impact of the rating decline is unknown, but it definitely shows a lack of confidence in the UK’s economy and highlights concerns. The rating could impact the economy’s growth prospects and cause investors to move money into other currencies, which would cause the value of the sterling to continue to fall. The rating decline could also cause interest rates to rise and make it more expensive for the UK to borrow money. Moody’s predicts that the UK is one of the few big European economies that will see an increase of public debt, likely peaking at 93% of GDP in 2019. Brexit will also likely cause economic growth to slow to around 1% next year. Together, it is not a rosy combination.
Moody’s rating change is the latest blow to May and shows the continued uncertainty around Brexit. The effect of the rating decline is unknown, as is the future state of the British economy.