Moody's: UK's creditworthiness under downward pressure following EU exit vote, but important strengths remain

The UK's creditworthiness is under downward pressure following the decision to leave the European Union, says Moody's Investors Service in a report just published. Uncertainty surrounding the UK's withdrawal from the EU will likely affect economic growth and weaken government finances. However, the UK also retains important strengths, including its large economy and solid institutional strength.

"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. Given the complexity and sheer amount of economic policy decisions in the coming years, the UK's institutions will be tested," says Kathrin Muehlbronner, a Senior Vice President at Moody's.

Moody's forecasts real GDP growth of 1.5% and close to 1% for 2016 and 2017, respectively. The risks to these forecasts are squarely to the downside, with a much lower growth rate for 2017 a distinct possibility.

In line with recent announcements from the government, Moody's expects fiscal policy to be loosened this year and next, compared to earlier expectations of continuing fiscal restraint. 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.

Moody's expect the public debt ratio to stagnate close to current levels of around 90% of GDP at best. It notes that asset sales this year are unlikely to materialise now, while the March 2016 budget had assumed asset sales of more than GBP20 billion.

But the UK also retains important credit strengths that are unaffected by the exit-related uncertainties. The UK is a large, diversified and competitive economy, with high wealth levels and flexible labour and product markets.

Important aspects of institutional strength, such as a strong and long-established legal system, are also unaffected. The credibility of the Bank of England should ensure financial stability, while exchange rate flexibility provides some support for exports and the UK's external stability.