The UK had its credit rating cut by Moody’s Investors Service, which blamed Brexit, a sluggish economy and Theresa May’s weakened political position.
It lowered the UK on Friday by one notch to Aa2, the third-highest investment grade. While both other major rating companies downgraded Britain shortly after the referendum in 2016, this is the first cut since May’s election gamble backfired this summer, wiping out her majority, and, according to Moody’s, forcing her into unhelpful fiscal compromises.
The Moody’s announcement came just hours after Prime Minister May gave a key speech on her vision for the U.K.’s separation from the European Union. In it, she said she would seek a transition period of around two years after Brexit, but failed to outline specifics on the divorce bill. Moody’s assessment of the exit was less than optimistic.
“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.”
It expects weaker public finances, partly due to slower economic growth, but also reflecting “increasing political and social pressures to raise spending after seven years of spending cuts.” The decision was part of the rating companies scheduled calendar of sovereign reviews.
The election “reinforced some of those concerns around the fiscal policy that we had before,” said Kathrin Muehlbronner, lead UK Sovereign Analyst at Moody’s. “The low hanging fruit has been picked and the fat has been trimmed. That clearly has been an issue during the election campaign.”
The government responded that the rating assessment is out of date after May set out what it said was an “ambitious vision” for Brexit. It also said it’s “not complacent about the challenges ahead but we are optimistic.”
May’s ability to persist with austerity has been weakened since she lost the government’s majority. She abandoned a pledge to review state pensions, is increasing pay for some public sector workers and agreed to more spending in Northern Ireland to get support from a regional party to keep her in power.
“Fiscal pressures will be exacerbated by the erosion of the U.K.’s medium-term economic strength,” Moody’s said. There are “increasingly apparent challenges to policy-making given the complexity of Brexit negotiations and associated domestic political dynamics.”
While years of austerity have brought down the budget deficit since the financial crisis, debt remains high by advanced-economy standards. Moody’s expects it to hit almost 90 per cent of GDP this year and only peak in 2019, two years later than the government plans.
“Brexit is a hugely complex undertaking and will dominate policymaking in the years to come,” Muehlbronner said. “It’s difficult to imagine the government being able to have any focus on anything else.”