Moody’s has downgraded the UK’s credit rating from AAA to Aa1 based on continuing weakness in the medium-term outlook for economic growth.
The ratings agency made the announcement on Friday, citing “sluggish” economic growth made worse by both macro economic factors and the ongoing domestic public- and private-sector deleveraging process.
It warns this growth environment poses a threat to the Government’s fiscal consolidation efforts. Moody’s now expects the UK’s gross general government debt level to peak at just over 96 per cent of GDP in 2016.
Moody’s changed the outlook for the UK’s rating to negative in February 2012 citing concerns over the pace of fiscal consolidation due to materially weaker growth prospects.
The ratings agency says: “After it was elected in 2010, the Government outlined a fiscal consolidation programme that would run through this parliament’s five-year term and place the net public-sector debt-to-GDP ratio on a declining trajectory by the 2015-16 financial year. Now, however, the Government has announced that fiscal consolidation will extend into the next parliament, which necessarily makes their implementation less certain.”
While Moody’s says the UK’s debt servicing capacity remains very strong, these two factors have impaired its ability to “quickly reverse the impact of adverse economic or financial shocks” and the UK can no longer be said to have the same resilience as other AAA rated economies.
Legal & General Mortgage Club managing director Ben Thompson says: “This downgrade – while embarrassing and untimely – will not have come as a shock. Markets will have expected this to a certain degree and there should not be much disruption to the cost of funding. Moreover FLS and other measures implemented have ensured that cheap funds are at the ready, so mortgage pricing should continue to remain low.
“In fact, if anything, competition amongst lenders to attract certain borrowers will increase, so we expect to see further record lows such as the five year fixed rate just announced by the Yorkshire Building Society.”
The Federation of European Employers secretary-general Robin Chater says: “The downgrading of the UK’s credit status is a blow for the UK as a leading financial centre and the UK balance of payments is so reliant on its financial services that even a small loss in trading income could affect the value of Sterling and have a major impact on GDP.
“Regaining international confidence by further government spending cuts is going to take far too long to affect the economic fundamentals and could harm public confidence if it reduced the quality of public services “