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Moody's, Fitch warn weaker growth could hit the UK's AAA rating

(Update) Two leading credit ratings agencies respond to the Budget by warning that weaker economic growth or persistently high inflation could jeopardise the UK's prized triple AAA rating.


(Update) The official forecast for UK growth was cut sharply yesterday prompting warnings from credit ratings agencies Fitch and Moody's that weaker growth or persistently high inflation could jeopardise the UK's prized triple AAA rating.

Alongside the Budget the Office for  Budget Responsibility cut its growth forecast for this year to 1.7% from 2.1% and the 2012 growth forecast to 2.5% from 2.6%.

For now, both credit agencies are happy with chancellor George Osborne's plans to cut the country's debt pile. But the pair warned that if the economic recovery remains weak or inflation remains as high as it is now that could hit government revenues and increase spending, making it more difficult for the coalition to hit its targets. 

David Riley, head of sovereign ratings at Fitch, said, 'if the economic recovery proves weaker than projected, future Budgets may require additional measures to ensure that the government meets its ambitious fiscal targets.'

Sarah Carlos, UK sovereign analyst at Moody's, said the risk would come if weaker economic growth was accompanied by a failure by the government to achieve its austerity spending cuts.

‘Although the weaker economic growth prospects in 2011 and 2012 do not directly cast doubt on the UK’s sovereign rating level, we believe that slower growth combined with weaker-than-expected fiscal consolidation could cause the UK’s debt metrics to deteriorate to a point that would be inconsistent with a AAA rating.’

The comments may lead to some sleepless nights for chancellor George Osborne as most economists believe the new, lower growth forecasts remain overly ambitious.

The highly regarded National Institute for Economic and Social Research yesterday said it expected the UK economy to grow just 1.5% this year and 1.8% in 2012 ‘due in large part to very weak consumer spending growth.’

News today that retail sales fell much more than expected adds to worries. Figures from the Office for National Statistics showed total sales fell 0.8% in February from January, although they rose 1.3% year on year.

about the outlook for UK growth because domestic consumption accounts for around 75% of UK economic output.

Carlson said that above target inflation is also a worry because inflation-linked borrowing makes up around 20% of the government's borrowing and 'higher inflation will lead to higher interest costs.'

There was more bad news for Britain's already squeezed households.

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9 comments so far. Why not have your say?

Common Man

Mar 24, 2011 at 07:12

As we have seen in many countries there is a tipping point within the general population. The British are not militant at heart - although we will see the usual cabale of hooligans on the streets of London this weekend no doubt - but whilst they understand the need to tighten belts they have a limit and this is the ball juggling that the current Government must handle. Unfortunately the profligacy of Labour is going to haunt the UK for a decade and to see them in such denial as they sit on the opposition benches is quite galling I am sure to many people. The mess needs to be sorted but as ever the common man will pay with lost jobs etc. What most will also fail to understand is that we are now spending millions on another military action far from our shores with an uncertain ending. This will be paid out of Treasury reserves - if we have reserves why not use them to pay off some debt now?

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Mar 24, 2011 at 09:37

Yesterday was a AAA rated day for me. Most of it was spent in my garden working hard. The fact that I still have the health and strength to cultivate it is the most satisfying factor. Ground was turned over and muck dug in leaving a clean, fresh tilth.

The groundwork is now done in preparation for planting potatoes next month.

The "investment" has cost me £20 (£10 manure + £10 seed) If I achieve a growth factor ratio of 5 : 1 I shall make a small profit plus my capital will be returned. Like the budget, that's slightly optimistic, it will depend to some extent on weather conditions during the growing season, and I will also have to compare the quantity and quality of what I have produced with prices being charged by the supermarkets next autumn.

As regards the budget: The reduction in fuel duty was a master stroke by the chancellor. It will help everybody, either directly, or indirectly. The increase in income tax personal allowances does not affect me. As a pensioner I will not receive the £630 uplift as such. To do so would have put the total allowance above the govts. £10,000 target level. However as I understand it we shall receive an increase to the allowance in line with September measured RPI. If the economy continues to inflate at its present rate that would give an increase of 5.5% or £530 for younger pensioners, but I'm not so sure we shall get all of it. Last year the link to average earnings was restored. It follows therefore that average earnings are unlikely to rise by 5.5%

Thirdly, there was good news from Libya. The coalition forces appear to be making the desired impact, although the end game is still clouded in mystery. The rebels are in good voice, but it seems nobody is handing out any hymn sheets.

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Mar 24, 2011 at 10:57

I can still remember the conservative induced huge recession of the 1990s where we were the only country in the world to have a recession. At that time it was the worst recession since the 1920s all in the name of pacifying the markets and bankers.

The bankers have vested interests from personal financial gain from encouraging government belt tightening. The people pay for it with their jobs, and with their reduced personal wealth. There is a balance which was clearly mismanaged in 1990 and we are making the same mistake again. The labour government in 2008-9 was treading the line between massive recession/ deflation/ stagnation and unaffordable inflation (too much quantitative easing) in a more balance way (like the Americans currently are) .

Many may consider this apostasy, but puritanical (conservative) austerity, financial abstinence and inflicting physical economic pain is not the only path to atonement of our financial sins.

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Graeme Thomson

Mar 24, 2011 at 11:05

Economics is simple and even we lesser mortals follow the thread:

1. If you live life spending your savings and borrowing one day you will be forced to stop and it wont be pleasant- worse when your leaders lie to you about the situation- Mr Brown was, for example, borrowing £2,000 pa for each worker in the GOOD times and dressed it up as "investment"- pubic pensions liabilities for the future and PFI too was never in these number but we all could see the train wreck coming- see good examples of this in UK, USA, PIGS etc

2. If you work hard, invest in new machinery and techniques and save along the way then you will get richer and more success will follow. Live within your means. eg China, India, Brazil, Germany. If your leaders tell you how it is then you know! No illusions or tricks.

So, when comparing 1 to 2 we all know that 2 will have a happy life and 1 will have trouble, falling living standards and collectively need to move their butts!

As Homer SImpson would say...."Doh!!". So we had better all stop feeling sorry for the lesser handouts, lower incomes, envy of others, blame anyone but ourselves and take responsibility for our bit and work and strive and fix it before it becomes terminal. As Brits we know we can do whatever we turn our minds to so come on everyone and lets turn our country back to one we feel pride in and which others will again envy. Simples!

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Mar 24, 2011 at 11:38

Nemesis “I can still remember the conservative induced huge recession of the 1990s where we were the only country in the world to have a recession.”

Oh yeah? What about Sweden? What about Canada, to name but two? Whatever mistakes the Tories made in the early nineties, the economy was back on track by 1997 when Brown started raiding the till. I do not support any of the major parties but I do get fed up with Socialist apologists who blatantly practice economic denial.

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Mar 24, 2011 at 12:50

We the taxpayers have currently put £500 billion in to inflating the economy to pay for the city institutional profligacy (yes I agree with Mike O'Neil that more regulation by Blair /Brown would have let them stop this happening).

What we are arguing about is the least painful way to pay that back

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Common Man

Mar 24, 2011 at 13:22

One definition of 'nemesis' - a source of harm or ruin - how apt as could so easily apply to the last Labour Government!

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an elder one

Mar 24, 2011 at 14:55

One tires of the credit-rating windbags and their ruminant speculations.

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Mar 24, 2011 at 16:33

Those who spend their money on cigarettes, whiskey, and wild women will be hit the hardest in this austerity budget.

For the rest of us life will still be tough. As the song goes: "I didn't promise you a rose garden" The answer is; to spend a little time forward planning.

I have already factored in higher food and transport costs. The next priority is home heating, which requires particular attention, bearing in mind that winter fuel payments are to be reduced by £50 and £100 for respective age groups.

I shall stick to my trusty,dusty, solid fuel stove. Some might argue against this choice, but what I most like about it is the fact that I can keep it burning continously during the winter months. I have recently changed my coal supplier. The old one followed a policy of keeping minimum stock, and then gradually degrading quality in order to keep prices competitive. There was no real gain for the consumer as a higher volume of fuel was required for the same heat output, together with the associated increase in dust and ash to contend with. My present supplier although dearer initially, fully stacked his yard last October, and covered the stock with tarpaulin sheets. I have been supplied with consistently high grade dry fuel with no increases in price throughout the winter. I intend to follow his example and replenish my stock before prices go up next winter.

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