Moody's warns UK credit rating at risk if growth stalls

A collapse in economic growth, an escalation in the eurozone debt crisis, or a wobble by George Osborne over his austerity plans would cost the UK its prized AAA credit rating, a leading rating agency has warned.

A collapse in economic growth, an escalation in the eurozone debt crisis, or a wobble by George Osborne over his austerity plans would cost the UK its prized AAA credit rating, a leading rating agency has warned.
Preserving Britain's gold-plated rating has been central to Mr Osborne's strategy. Credit: Photo: AFP

Moody's, which recently cut Belgium by two notches and is monitoring France, reaffirmed the UK's sovereign rating but said the country's large budget deficit, slow growth and euro area exposure have reduced its "ability to absorb further shocks without rating implications".

Demonstrating how vulnerable the UK is to a downgrade, Moody's based its prognosis on growth in 2012 of 0.7pc – in line with the official forecast, but more optimistic than both the Organisation for Economic Co-operation & Development's prediction of 0.5pc and the contraction expected by a swelling group of City forecasters.

Deutsche Bank on Tuesday added to the sense of doom by slashing its outlook for growth next year to "zero" and warning of a "modest technical recession".

Preserving Britain's gold-plated rating has been central to Mr Osborne's strategy. The Chancellor has staked his reputation on it, claiming that market credibility has helped keep borrowing costs down for the Government, businesses and households.

Moody's strengthened the Chancellor's hand. "The currently stable outlook on the UK rating depends in part on the assumption that the Government will stay on track with its fiscal consolidation programme," it said. Sarah Carlson, a senior analyst, added that the decision was partly based on the UK's "very strong record of reversing increases in debt".

"If that record was not maintained, it would have an implication for the outlook, if not the rating itself," she said.

However, the Government now appears cornered. Moody's warned that weak growth "will likely slow the pace of fiscal consolidation" and that the legacy of debt left by Labour "has eroded its ability to absorb further macroeconomic or fiscal shocks".

"Risks emanating from the euro area" are further complicating matters. However, the "competitive" economy, strong institutions such as the Bank of England, and ability to control monetary policy all set the UK apart from the Continent.

An Treasury spokesman said: "As Moody's points out, the UK is not immune to the problems facing our trading partners in the euro area... it is important that the euro area continues to take decisive action to fix their problems."