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S&P affirms UK rating but warns on growth

Standard & Poor’s has affirmed the UK’s top credit rating but warned that the government’s recovery plan is “optimistic”.

The agency maintained the country’s AAA long-term and A-1+ short-term sovereign credit ratings while keeping the outlook at stable.

A statement by S&P says the rating was affirmed in light of the UK’s “wealthy and diversified economy, fiscal and monetary policy flexibility, and relatively adaptable product and labour markets”.

It also cites the country’s deep capital markets and the strong demand for gilts coming from its domestic institutional investors, combined with non-residential demand for sterling-denominated government debt.

However, S&P adds that the government’s steep correction of its fiscal accounts is likely to “weigh on the economy” in the coming years.

“The official assumption that the private sector will quickly step in to replace the withdrawal of public spending may prove optimistic, especially given weakening external demand and underlying structural impediments to economic growth, which will likely take time to correct,” the group says.

In addition, it claims the impediments to the country’s growth, which include insufficient investment in infrastructure and a shortage of workers with technical skills, will be difficult to overcome given the focus on fiscal austerity.

S&P’s forecast for the UK’s growth is 1.8% on average between 2011 and 2014.

This prediction, which is lower than the Office for Budget Responsibility’s 2.5 per cent, is based on the agency’s opinion that the rebalancing of the economy will take longer than the government assumes.

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