Fitch Takes Off the Rose-coloured Glasses for a New Look at U.K.

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Apparently the U.K.’s Chancellor of the Exchequer failed to impress the analysts at Fitch Ratings. The ratings firm said this afternoon that it is putting the country’s ‘AAA’ rating on watch with an eye toward a near-term downgrade. Fitch calls this Ratings Watch Negative.

The ratings agency cited the latest forecasts that indicate that U.K. debt will rise later and to a higher level than previously expected. The budget message that was delivered a few days ago now forecasts that government and public sector debt will peak in 2016-2017 at 100.8% and 85.6%, respectively, and will not begin to decline until 2017-2018.

Among the key reasons for the negative watch are revised GDP growth forecasts. Fitch has revised its growth forecast from 1.5% in 2013 to 0.8%, and also revised the forecast for 2014 from 2% to 1.8%. The agency went on to say:

The persistently weak performance of UK growth, in part due to European growth, has increased uncertainty around the UK’s potential output and longer-term trend rate of growth with significant implications for public finances. The UK’s creditworthiness continues to be underpinned by its high-income, diversified and flexible economy – underscored by the rise in employment despite the tepid economic recovery – and the authorities’ commitment to deficit reduction. The independent monetary policy framework, as well as sterling’s reserve currency status, and the long average life of government debt are further rating strengths.

While a downgrade of the U.K.’s debt to less than its current ‘AAA’ status is not a foregone conclusion, there’s not much to say in favor of the country’s prospective trajectory.

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