Moody’s forecasts real GDP growth of 1.5% and close to 1% for 2016 and 2017, respectively. The risks to the forecasts are to the downside, with a much lower growth rate for 2017 a “distinct possibility”.
The latest comments follow the earlier assignment of a negative outlook to the UK’s Aa1 credit rating, prompted by the vote to leave the European Union.
"The UK's creditworthiness is under downward pressure following the decision to leave the European Union in a referendum on 23 June," said the annual credit analysis report.
Moody’s expects fiscal policy to be loosened in 2016 and 2017 in line with recent announcements from the government. The rating agency said the UK budget deficit is likely to remain higher than expected before the EU vote, at 3.6% of GDP in 2016 and 3.5% of GDP in 2017.
While Moody’s cites the period it took to find a new prime minister having been shorter than anticipated as positive, the agency said the question what alternative trade arrangements are negotiated with the EU and other countries around the world, and what fiscal policies the new government will adopt, are more important for the UK’s credit profile going forward.
"The economy will slow significantly in the near term, and medium-term growth prospects could be materially weaker if the UK failed to reach a new trade arrangement with the EU that allows it reasonably good access to the European Single Market,” said Kathrin Muehlbronner, senior vice president at Moody's Investors Service.
“Given the complexity and sheer amount of economic policy decisions in the coming years, the UK's institutions will be tested,” she added.
"The rating could be downgraded if negotiations with the EU are protracted and suggest that the government might not be able to preserve core elements of the UK’s current access to the EU Single Market," continued Muehlbronner.