With Fitch estimating that Britain’s debt in 2015-2016 may approach 100 percent of gross domestic product (GDP), the limit for a top “AAA” rating “the likelihood of a downgrade has therefore increased.” It said the negative outlook reflects Britain’s “very limited fiscal space, at the ‘AAA’ level, to absorb further adverse economic shocks in light of the UK’s elevated debt levels and uncertain growth outlook.” Fitch had put Britain’s rating on negative outlook, or subject to downgrade, in March.
Given the uncertainties of the fiscal and economic projections Fitch said it did not expect to resolve its negative outlook on Britain’s rating until 2014. However it warned a downgrade was likely if Britain’s medium-term growth outlook worsened, there were indications that government debt would exceed 100 percent of GDP, or an easing of fiscal policy that pushes back a reduction in debt levels. “Global economic headwinds, including those emanating from the on-going eurozone crisis, have compounded the drag on UK growth from private sector deleveraging and fiscal consolidation as well as from depressed business and consumer confidence, weak investment, and constrained credit growth,” said Fitch.
The ratings agency said it now expects Britain’s economy to contract by 0.3 percent in 2012 compared to an expectation of growth of 0.8 percent when it last formally reviewed the country’s rating in March. Fitch now forecasts that a weak recovery will begin in 2013 and that Britain’s output is not expected to surpass its 2007 pre-crisis peak until 2014.