A second ratings agency, Fitch, has downgraded the U.K.’s credit outlook, following S&P
Fitch has dropped the UK’s debt rating to “negative” to “stable” after the new government announced its mini-budget plan. The ratings agency warned that the large size of the “unfunded fiscal package” could cause substantial swells in government deficits there in the foreseeable future.
It expected that fiscal deficits in the mid-term could likely grow because of this plan — this decision comes after a similar ruling by the S&P ratings agency.
Regardless, Fitch upheld its “AA” rating for Britain, making it one rung higher than the S&P. The ratings agency pointed to the lack of independent budgeting forecasting and conflicts between the new parliament and the Bank of England’s response. Fitch said that the Bank had a negative impact on the financial market’s confidence in policy-making common sense, undermining an important aspect pillar the ratings agency uses to determine strength.
The chancellor reversed his decision to scrap the 45% income tax threshold for top earners, which was the government’s original strategy, but Fitch decided that this wasn’t a strong enough move to alter its decision.
In response, Fitch said that, despite the government reversing the 45p top rate tax cut plan (which would have led to £2 billion in costs), the following factors cause it to maintain this decision: the sentimental impact of the tax package, damage done to financial markets, the effect on public opinion, and the weakened credibility and support for any future fiscal strategies.
Fitch went on to warn that the British economy will shrink in 2023, regardless of the mini-budget. Its forecasts included the government deficit reaching 7.8% of GDP in 2022, rising to 8.8% in 2023, with the government deficits hitting 109% of gross domestic product going into 2024.
Political uncertainty was a key theme of the report, restricting options available to the new prime minister, Liz Truss.
Truss has tried to cool off concerns about the opaqueness of her tax plans and polarization of institutions after some speculation on possible revisions to the Bank’s mandate during the leadership contest that saw the rollout of a significantly large fiscal package that did not involve the Office of Budget Responsibility.
Support has reduced for the Conservatives, says Fitch. This has a significant social impact, with the populace who are already struggling with the living squeeze. The probability of strikes has increased in frequency. All of this constrains the Prime Minister’s ability to “manoeuvre.”
Ultimately, as warned by Goldman Sachs, the fundamental cause of the UK’s volatile markets remains unresolved.
Underlying Recession Unavoidable
BlackRock warned that recessions were due to occur as well as acute rate hikes.
The majority of investors hold grave opinions, warned BlackRock, expecting “recessions” and long-lasting inflation directed by the central banks, which will continue to sharply spike rates.
The vast majority of investors BlackRock cited said they were less bullish for Q4 — according to one poll carried out by the largest asset manager in the world, with the top concern being for recessions.
BlackRock was cynical about the approach of raising inflation being carried out by the central banks, the deputy head of BlackRock said in one meeting for Q4 of 2022.
Alex Brazier said the rates will continue to rise sharply across the UK, Europe, and the US. And that this will contribute to the recession.
Recessions are unavoidable in Europe because the underlying problem of energy remains unresolved. This is taking down living wages with it and lowering trading sentiment.
Alex Brazier, who was formerly an executive director for financial stability strategy with the BOE said that central banks have not yet accepted the fact that a deep recession is unavoidable and inflation needs to be lowered in response.
BlackRock believes that inflation hikes will be stemmed once the central banks start to understand how much damage it is reaping. However, it expects increases to go to last into 2023 and that the damage will be done by then.
Interest Rates Near 40-Year Peak
BlackRock says that central banks could feasibly cut their increases of interest rates in time enough to not deepen the recession beyond their inflation target. Both the European Central Bank (ECB) and the Bank of England have a target rate of 2%.
Although inflation cooled off slightly in August for the UK, dropping 29.9% from 10.1%, taking a little bit of pressure from British households — it is still very close to the highest inflation rate in four decades.
Most of the monetary policy committee (MPC) who make up the BoE’s mandating wing agreed to increase the base rate by 0.5% points up to 2.25% — the most since 2008 — determining that the acute dangers to the economy did not outweigh the risk of making inflationary pressures more concrete.
With the Bank attempting to control inflation, interest rates are expected to continue to climb sharply. However, Brazier said he believes that inflation will fall as food and energy prices stabilise and the recession stabilises to. However, he does not anticipate that the central banks will stop inflation in time to reach their targets.
The UK will be living with permanent inflation for the near term as a recession creeps in.
BlackRock Says Most Stocks Should Be Avoided
Assets are being sold off in the UK. This is happening at a faster rate then the market is recognising. Policymakers are overestimating the stability of the UK and underestimating the rate of its downward trajectory.
BlackRock reportedly is looking for ways to weather the volatile market storms. Its central approach is studying the firms that are taking the recession seriously and figuring out ways to restructure. BlackRock staff think that markets will have a long-lasting “choppy” situation and BlackRock goes as far as to say that most investors should avoid most stocks because the risks are too high
Executives and fund managers at the company supposedly are seeking more balanced strategies — this is the key focus; how to boost the stability of portfolios. Nonetheless, the recession cannot be avoided — it’s a storm that must be weathered and there will be companies who drown and those who do not. An executive for BlackRock, Becci Rowe says that there “will be winners and losers.”
Rowe believes that the best strategy is to seek high-quality businesses, and BlackRock itself is taking a serious look at its financial grounding. Her view is that the companies to look out for will be the ones who could possibly become stronger because of the storm as opposed to those who will have to survive.
Fidelity is the key characteristic that executives at BlackRock will be searching for. This means seeking out companies who have bigger buffers between the market chaos and their balance sheets.
Final Words — Blackouts Indicate Much Deeper Recession Than Expected
We must consider the context of the UK, which is currently considering rolling blackouts. After the pandemic and with compounded effects from a broken supply chain and gas shortages, there is no reason to believe the recession will be deep and far worse than policymakers are anticipating.
Millions of businesses and homes in Britain face planned power cuts for 2022’s winter — this warning comes from the National Grid due to gas shortages and reductions in electricity imports from Europe (most notably, the second biggest exporter of oil, Russia).
Power cuts could be as long as three hours, says the National Grid in the worst-case scenario. As much as one in seven pensioners could be left with no power.
If this emergency plan was set into effect, British residents would be alerted 24 hours in advance of the three-hour electricity cuts. During this period of time, the power would be cut off, in order to reduce energy consumption by 5%.