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COVID-19 and Brexit pushes Moody's to downgrade UK credit rating

Suban Abdulla
·3-min read
The sovereign debt rating was lowered one mark from Aa3 to Aa2. Photo: Getty
The sovereign debt rating was lowered one mark from Aa3 to Aa2. Photo: Getty

Britain’s credit status has been downgraded by ratings agency Moody’s (MCO) amid a decline in economic strength in the wake of COVID-19 and Brexit uncertainty.

While the sovereign debt rating was lowered one mark from Aa3 to Aa2, the “negative” outlook attached to the rating had been moved to “stable” ahead of an expected stabilising of the overall debt burden next year.

The agency said that the UK’s growth had been “meaningfully weaker than expected and is likely to remain so in the future.”

“Despite the projected recovery, we estimate a sharper peak-to-trough contraction for the UK than for any other G20 economy because of the relatively greater severity of the coronavirus outbreak, the reliance of the UK economy on service activities which involve greater levels of human interaction, and the continued risk of further outbreaks and localised restrictions,” Moody’s said in a statement.

It added that “lingering Brexit uncertainty” is also expected to delay Britain’s recovery.

“Even if there is a trade deal between the UK and EU by the end of 2020, it will likely be narrow in scope, and therefore the UK’s exit from the EU will, in Moody’s view, continue to put downward pressure on private investment and economic growth,” the agency said.

READ MORE: Pound up as markets shrug off Boris Johnson's no-deal Brexit speech

Amid the turmoil, the pound remained resilient on Friday after prime minister Boris Johnson warned UK businesses to prepare for an “Australian-style” Brexit, signalling that trade talks with the EU were now effectively “over.”

Johnson’s announcement was met with backlash from business chiefs, who cited concerns over the “severe economic disruption” next year.

Meanwhile, a member poll by the Institute of Directors (IOD) found 15% of UK business chiefs had already begun stockpiling goods, products or parts, and another 12% said they planned to do so.

Some 37% said they had already begun putting additional cash aside, and another 13% said they intended to.

The services industry, the UK’s biggest sector which includes banking, restaurants, hotels and retail and makes up about 80% of the economy was particularly hit hard by the pandemic.

In August, a Confederation for British Industry (CBI) survey showed that optimism in the sector was mixed in the last quarter with business and professional services experiencing a slight uptick in sentiment — up 9% from -79% in May, while sentiment in consumer services dropped less sharply to -20% from -86% in May.

READ MORE: One in four UK firms stockpiling for Brexit disruption

It comes at a time when more than half the country is living with tightened coronavirus restrictions with the PM threatening to step in to force Greater Manchester to accept a Tier 3 lockdown without any extra money for businesses.

From midnight on Friday London officially entered Tier 2 restrictions, meaning that people will be banned from socialising with other households in indoor settings, including pubs and restaurants.

On Wednesday, Johnson announced a new three tier ‘traffic light’ system to tackle the second-wave of COVID-19 cases with businesses in the hospitality industry still subject to a 10pm curfew and can only provide table-service.

The traffic light system will “simplify and standardise” the existing patchwork of local lockdown rules, Johnson said.

Each level — “medium,” “high,” and “very high” — involves escalating restrictions. Most areas in England will automatically move to the “medium” alert level, the PM said. This involves restricting people to socialising in groups of no more than six.

Under the “very high” alert level, pubs and bars will be ordered shut. Local leaders will also have discretionary powers to order other non-essential businesses to close.

Watch: Why tax rises may be inevitable in Britain