Firms are going to delay investment and hiring decisions as a result of the Brexit vote, which will take a significant toll on the UK economy, the rating agency Fitch has warned.
The agency, which downgraded the UK’s credit rating on Monday, cut its forecasts for GDP growth and said the UK’s vote to the leave the EU had come at a time when the world economy was at a “fragile juncture”.
For the UK, Fitch said the outcome of the referendum would hit investment because of the uncertainty on three issues: the future of the UK’s trading relationship with the EU; the regulatory backdrop; and political uncertainty, including a possible referendum in Scotland.
“The main source of uncertainty relates to the future of the UK’s trading relationship with the EU – its main trading partner and destination for 44% of UK exports,” Fitch said. It also cast doubt on any hope that the UK would secure membership of the European Economic Area trading bloc, as suggested by some.
“This uncertainty will prompt firms to delay investment and hiring decisions, while elevated financial market volatility will further damage business confidence,” Fitch said.
It said investment would fall by 5% in 2017 and by 2018 it would be 15% lower than expected, while growth in GDP would be less than 1% in 2017 and 2018, half its previous forecasts made only last month.
“GDP growth is now expected to fall to 0.9% in 2017 and 2018, downward revisions of one percentage point both years compared to Fitch’s forecast in May,” the rating agency said.
“There is already significant anecdotal evidence of Brexit fears in advance of the referendum affecting investment decisions.”
Fitch had already stripped the UK of its coveted AAA rating in 2013 but further cut its rating on Monday to AA from AA+. Standard & Poor’s, the last of the major rating agencies to give the UK the highest rating, cut its rating on Monday in the wake of the vote for Brexit. Moody’s, which also toppled the AAA crown off the UK in 2013, is reviewing its current rating.
Fitch said the near-term impact on the global economy from the UK’s vote to leave would be manageable, as the trade exposures of the US and Asian economies were small.
“The eurozone will suffer a larger shock from weaker UK demand and the depreciation of the pound, but for the block as a whole, growth adjustments will likely be significantly smaller than for the UK,” Fitch said.
