Fitch downgrades UK growth forecasts, warns of deeper recession

Fitch Ratings downgraded its UK growth forecast for next year on Monday, as it warned a deeper-than-expected recession is now likely.

The ratings agency - which last week downgraded its credit outlook on the UK to ‘negative’ from ‘stable’, citing the mini-budget - now expects UK GDP to shrink 1% in 2023, having forecast a 0.2% contraction in September.

It cited "“extreme volatility" in UK financial markets and the prospect of sharply higher interest rates.

The ratings agency noted the sharp selloff in government bonds and sterling following the mini-budget on 23 September, "as sizeable unexpected and unfunded tax cuts - coming on the back of a large-scale energy price subsidy - signalled sharp increases in government borrowing".

Fitch now expects much more rapid interest rate rises from the Bank of England as it tries to offset the impact of looser fiscal policy and a weaker currency on inflation, "buttress investor confidence in sterling assets and demonstrate its independence in the face of increased financial market concerns about fiscal dominance".

The agency now expects the policy rate to rise to 4.25% in December from 2.25%, and to hit 5.0% by the second quarter of 2023. Previously, Fitch had expected rates of 3.0% and 3.25%, 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."