23rd Feb 2026 11:25
(Alliance News) - Fitch Ratings on Friday maintained its stable outlook and AA minus rating for the UK amid "modest" gross domestic product growth.
"The UK's ratings are supported by its high-income, large, diversified and flexible economy, credible macroeconomic policy framework, and financing flexibility from deep capital markets and sterling's international reserve currency status," Fitch said.
The ratings agency said this is set against high public and external debt, with a debt interest to revenue ratio that is more than double the AA peer group median.
Fitch projects that GDP growth will slow to 1.1% in 2026 from 1.3% in 2025, due to a weakening labour market and more subdued investment.
It expects growth to rise to 1.5% in 2027 as monetary policy easing supports domestic demand, but still below the AA median of 2.6%.
"We assess potential growth at 1.4%, with a moderate upside from faster progress on housing planning reform and sustained higher public capex, or if EU trade integration goes further than is currently being negotiated," Fitch said.
It added that a sharper, sustained slowdown in migration from the tightening of visa and permanent residency requirements is a key downside to growth.
Fitch expects the general government deficit to narrow by 0.6 of a percentage point to 4.8% of GDP in 2026 and 4.5% the following year, above the current AA median of 2.3%.
With the tax to GDP ratio set to rise to a historically high level, the ratings agency said the scope to absorb fiscal shocks through further taxation is constrained, especially against the backdrop of 2024 Labour manifesto pledges to not raise income tax, VAT or national insurance.
Fitch said its projected deficit reduction through 2027 is around 0.5 of a percentage point slower than government targets which reflects "slippage against plans to slow real-term growth in public sector spending".
"Greater pressure on Prime Minister Starmer's position amid the government's weak public approval ratings adds to fiscal policy uncertainty. Some implementation risk was already evident in the reversal of planned welfare cuts in 2025, albeit mitigated by the government's large parliamentary majority and with the next general election not required for another three and a half years," Fitch said.
It added that the likelihood of a leadership change is "uncertain" along with its potential timing and policy repercussions. It said fears of triggering higher gilt yields will prevent sharp fiscal loosening.
However, Fitch noted that the autumn government budget underlined its view that Chancellor Rachel Reeves is more committed to the fiscal rules than her predecessors.
Fitch forecasts inflation to fall to 2.4% at the end of 2026 from 3.0% currently, and to 2% at the end of 2027. It projects the policy interest rate will be cut 75 basis points by the Bank of England to 3% over the course of 2026.
Fitch said a markedly higher path of government debt to GDP that fails to stabilise could lead to negative rating action.
This could also be impacted by evidence of a substantially weaker economic growth outlook due to a larger-than-anticipated impact from the recent succession of shocks.
However, greater confidence in government debt to GDP being placed on a clear downward path over the medium term could lead to positive rating action.
By Michael Hennessey, Alliance News reporter
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