UK economy to slump 10.1% as debts surge, warns Moody’s

Britain will suffer the sharpest peak-to-trough economic slump of any major economy this year, rating agency Moody’s warned on Friday, and the coronavirus crisis will push up national debt as a share of Gross Domestic Product (GDP) by nearly a quarter.

Moody’s said the UK government’s latest 30 billion pound ($37.9 billion) stimulus package, announced this week, would aid a gradual economic recovery but add further pressure to the UK’s fiscal position.

“The UK’s public debt ratio will likely rise by 24 percentage points of GDP or more relative to 2019 levels,” a group of Moody’s analysts wrote in a note, taking the debt to 109% of GDP this year.

“We forecast a contraction of 10.1% in the UK’s GDP for this year, but expect a gradual subsequent recovery on the back of the easing in lockdown measures, with growth rebounding to 7.1% next year.”

Moody’s rates Britain Aa2 with a negative outlook following a series of cuts since the country voted to leave the European Union in mid-2016.

Meanwhile, Chancellor of the Exchequer Rishi Sunak spoke to Carl Arntzen, CEO of Worcester Bosch, during a visit to the Worcester Bosch factory in Worcester, UK, on Thursday.  The UK government on July 8 committed £30 billion to saving jobs and helping the young find work in an economy ravaged by the coronavirus pandemic.

Delivering a mini-budget to parliament, Rishi Sunak announced bonuses to companies retaining staff and taking on apprentices, investment in eco-friendly jobs and even allowing Britons to enjoy discounted meals in some restaurants.

Fitch, another ratings agency, said it now expected Britain’s economy to shrink by 9% this year, a bigger hit than its previous projection of a 7.8% contraction, and the budget deficit would leap to as much as 17% of economic output.

Fitch said the government’s 30 billion pound stimulus package would probably only cost 21 billion pounds - largely because millions of furloughed workers were likely to be sacked later this year, rather than their employers taking a 1,000 pound government grant to reinstate them.

Britain is on course to take state borrowing to World War Two levels, though the government has said finances will return to a sustainable footing over the medium term.

Moody’s said high-frequency indicators suggested that economic activity has gradually begun to recover after reaching a trough in April, when GDP is estimated to have contracted by just over 20%.

“Our forecast estimates a sharper peak-to-trough contraction for the UK than for any other G20 economy, taking account of our view that lingering uncertainty around Brexit will hold back the recovery in the second half of the year,” Moody’s said.

Last month the International Monetary Fund (IMF) was less downbeat about Britain, forecasting that France, Italy and Spain would all suffer bigger downturns than Britain this year.

Moody’s said Britain’s Autumn budget, due in the final quarter of the year, would be key to providing greater clarity on the UK’s future path of government indebtedness.

British government borrowing is on course to surge to around 350 billion pounds ($442 billion) this year following new COVID-19 spending announced by finance minister Rishi Sunak, and could rise higher still, a leading think tank said on Thursday. “Back in March, the government forecast a deficit of about 50 to 60 billion pounds this year. Our current estimate is it could well be around 350 billion pounds,” IFS deputy director Carl Emmerson said.

The IFS said Sunak was likely to looking to support the economy again in the autumn although that next phase of help would probably be more targeted.

Sunak on Wednesday announced subsidies for firms that bring employees back from furlough, temporarily scrapped purchase taxes for properties costing under 500,000 pounds and cut value-added tax on spending at hotels and restaurants.

These and other recent measures would cost 30 billion pounds, while previous measures announced since March would cost 30 billion pounds more than first thought, according to the finance ministry.

Huge uncertainty surrounded exactly how much Britain would borrow this year due to the economic damage from COVID-19, but as a share of output it was on course to be its highest outside wartime in more than 300 years, Emmerson added.

Reuters