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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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- Office for National Statistics: retail sales February 2011
- Office for Budget Responsibility: Economic and Fiscal Outlook March 2011
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