Top rating agency warns of deeper recession in UK, downgrades growth forecast

A leading international credit rating agency has warned that the United Kingdom is likely to tip into recession in the last quarter of this year as a result of soaring inflation and a hike in bank interest rates. 

According to Fitch Ratings, which last week downgraded its credit outlook on the UK to ‘negative’ from ‘stable’, the country's gross domestic product (GDP) is expected to decline by one percent in 2023, a sharp turnaround compared to 0.2 percent contraction in September.

The report released on Monday noted that “rising funding costs, tighter financing conditions, including for mortgage borrowers, and increased uncertainty” are the main factors that outbalance “the impact of looser fiscal policy in 2023".

"The jump in real interest rates sparked dysfunction at the long end of the government bond market as defined-benefit pension funds faced margin calls on out-of-the-money interest rate swap positions related to liability-driven investment strategies," it said.

Fitch expects much more rapid interest rate rises from the Bank of England (BoE), from 2.25 percent to 4.25 percent by December 2022 and 5.0 percent by the second quarter of 2023. Previously, Fitch had expected rates of 3.0 percent and 3.25 percent, respectively, which was below market expectations.

"Rising funding costs, tighter financing conditions, including for mortgage borrowers, and increased uncertainty will outweigh the impact of looser fiscal policy in 2023," it said. "Fitch sees the economy entering recession from 4Q22 as rapid rate rises compound the impact of the energy crisis and the contraction in the eurozone."

To prevent a doom loop of pension fund forced selling to raise collateral, the BoE was forced to announce a temporary intervention to buy up to GBP65 billion of long-dated gilts.

British pound hits all-time low as PM Truss is accused of gambling with economy

The British pound has plunged to an all-time low against the dollar with investors looking for exits after the new Tory government’s fiscal plan threatened to stretch the crisis-battered country

In September, the BoE raised interest rates by the largest margin in nearly three decades to combat the skyrocketing inflation that has squeezed the life of Britons over the past few months.

Moreover, the British currency plummeted to an unprecedented $1.0327 last month, the lowest since the United Kingdom went decimal in 1971.

The weakening of the pound will worsen the impact on UK energy prices, which have been surging through the past months as a result of sanctions against energy-giant Russia in the Ukraine conflict.

Fitch sees the UK economy heading for a recession starting as soon as the last quarter of 2022 as a result of runaway inflation, sharp interest rate rise, and the Ukraine conflict.

Meanwhile, Jamie Dimon, JPMorgan Chase & Co. chief executive officer (CEO) has also warned that ‘serious’ headwinds are likely to push the global economies into recession in the next 6-7 months by the middle of next year.

“I mean, Europe is already in recession and they’re likely to put the US in some kind of recession six to nine months from now," Dimon was quoted as saying in an interview with CNBC on Monday.

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