Moody's warns that UK could lose coveted triple-A credit rating

Thursday, 15 November 2012 11:51

By Ben Salisbury

Moody’s the credit ratings agency has warned that it will look again at the UK’s AAA credit rating early next year as it looks to assess the performance of the UK economy and the impact that the euro debt crisis is having on it.

Moody’s says it will reassess the UK’s credit rating in early 2013.

In February, Moody’s downgraded the outlook for the UK from stable to negative but allowed the UK economy to keep its coveted triple-A rating.

Keeping the triple-A rating has been a cornerstone of the Chancellor, George Osborne’s economic policy since the coalition came to power. Mr Osborne believes it allows UK businesses and households to enjoy cheaper borrowing than many of our European counterparts.

Moody’s comment increase the pressure on the Chancellor to come up with a coherent and substantial growth strategy when he makes his Autumn Statement early in December.
Moody’s said that the biggest challenge the UK has is over balancing the need to lower the UK deficit with the need to stimulate the economy so that it grows.

In the third quarter of 2012, the UK enjoyed a full one per cent of growth, taking the economy out of its double-dip recession. However, the high level of growth was put down to one-off factors including the receipts from Olympic ticket sales.

Yesterday, the governor of the Bank of England, sir Mervyn King warned that the outlook for growth in the UK and inflation was bleak as he cut his growth forecast for the UK for 2013 from 1.8 per cent to 1.2 per cent and warned that inflation was likely to stay above the government’s target of two per cent until 2014.

He also said that the UK economy may already be contracting in the fourth quarter and warned that the UK will not recover to its pre-2008 level of economic activity until 2015.

A weaker economy makes it more difficult for the government to collect tax revenue which would help lower the deficit. Problems in the eurozone mean that the UK’s biggest export market is showing less demand for UK goods and services.

Moody’s said: “Government efforts to cut debt 'are being hampered by weaker economic prospects as well as by the risks posed by the ongoing euro area sovereign debt crisis.

“Although these challenges are currently reflected in the negative outlook on the UK's sovereign rating, Moody's will revisit the AAA rating and outlook in the first few months of 2013 to assess the impact of these challenges and of the government's upcoming autumn Statement.”

In the Bank of England’s Quarterly Inflation Report, the bank did not rule out adding to its £375 billion quantitative easing programme.

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