UK investment to drop 5% next year on Brexit, says Fitch

Investment in the UK economy is likely to fall by 5% next year following the vote to leave the European Union, according to ratings agency Fitch, which downgraded the UK’s credit rating to AA from AA+ earlier this week.

Fitch said that by 2018, investment in the UK would be 15% lower than it had forecast in its May 2016 Global Economic Outlook (GEO). It said the uncertainty brought about by Brexit will prompt firms to delay investment and hiring decisions, while elevated financial market volatility will dent business confidence further.

“Consumption will not be immune to this shock and overall spending by UK residents will see a mild decline in 2017. The sharp fall in the value of sterling will provide some offset to the demand shock, with exports likely to benefit somewhat in the near term.

“Imports look likely to decline as investment contracts and foreign products become more expensive, resulting in expenditure switching to domestically produced goods and services and higher inflation.”

Fitch said UK GDP growth was expected to fall to around 1% in 2017 and 2018, down 1 percentage point for each year from the May 2016 GEO.

The agency said that in addition to less favourable access to the European Single Market, reductions in trade openness and inward foreign direct investment could harm productivity performance, while reduced immigration would slow labour supply and potential GDP.

“These negatives will likely outweigh any GDP gains from deregulation outside the EU or the redirection of EU budget transfers.”