Improved UK Economic Outlook Leads to S&P Global Revising Sovereign Credit Rating

S&P Global, the credit rating agency, upgraded the United Kingdom’s sovereign credit rating outlook last Friday, removing the previously assigned “negative” label. This change was prompted by the UK government’s decision to forgo most of the unfunded budgetary measures proposed in September 2022, leading to an enhanced fiscal outlook for the country.

S&P maintained the AA rating for UK government debt but revised the outlook from “negative” to “stable.” Under Prime Minister Rishi Sunak, the British government has rolled back the majority of measures introduced by former Prime Minister Liz Truss. These measures had previously caused a bond market panic, necessitating the Bank of England’s intervention with emergency bond purchases worth billions of pounds.

Decreasing energy prices have contributed to an improved economic outlook for Britain. This development led the International Monetary Fund (IMF) to revise its forecasts upward last week. However, due to the ongoing pressure of high inflation on consumer spending, the IMF still predicts a 0.3% contraction in the UK’s economy for 2023.

S&P projects that the UK’s economic output will decline by 0.5% this year, followed by an average annual growth rate of 1.6% between 2024 and 2026. The agency commented, “Near-term downside economic risks have reduced. That said, we forecast medium-term growth will be below historical averages,” adding that the economic situation remains uncertain.

Furthermore, S&P acknowledged the positive impact of the agreement reached in February between the UK and the European Union regarding trade arrangements for the British province of Northern Ireland. Since Brexit, Northern Ireland has continued to follow EU regulations due to its open border with Ireland.

Although the immediate economic impact of this agreement is not expected to be substantial, S&P believes it could eventually contribute to improved relations between the UK and the EU. In turn, this development might benefit trade and investment activities between the two parties.