UK set to lose AAA credit rating from second ratings agency

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  By a Newsnet reporter

The credit ratings agency Fitch has placed the UK’s AAA credit rating on ‘negative watch’, just two days after Chancellor Osborne delivered the budget in which he was forced to admit that the UK economy was weaker than Treasury forecasts.

The likelihood that the UK will lose its AAA rating from Fitch comes just one month after the other large ratings agency Moodys stripped the UK of its AAA rating.

Analyst Nejra Cehic of Bloomberg said: “Some recent data has caused concern. Britain’s economy contracted by 0.3 percent in the final three months of last year and jobless claims fell less than economists forecast in February. But neither the government nor the Bank of England believe the UK will have a triple dip recession.”

The negative watch from Fitch means that it is possible that the UK will lose its second AAA credit rating in the near term.   Fitch expects to complete a review of the UK’s sovereign ratings by the end of April.

In a statement issued on Friday, Fitch said:

“The persistently weak performance of UK growth, in part due to European growth, has increased uncertainty around the UK’s potential output and longer-term trend rate of growth with significant implications for public finances.”

The statement also noted:

“… the latest economic and fiscal forecasts published by the Office for Budget Responsibility (OBR) that indicate that UK government debt will peak later and at a higher level than previously expected by Fitch”.

Mr Osborne’s recent budget presented a public spending plan that promised more austerity, despite weakness in the economy.  The negative economic figures released in the budget have raised fears of a third recession within just four years.   The UK Treasury has insisted that debt-reduction measures are the best way forward for the country despite mounting calls from opposition parties for increased spending on capital projects and greater investment in infrastructure to boost the economy.

Despite over three years of cuts and austerity, the Chancellor has not succeeded in reducing public debt, and the UK is borrowing more than originally forecast.  The economy continues to stagnate, and there is as yet no sign that Mr Osborne’s austerity measures are succeeding.

The independent Office for Budget Responsibility estimates that public debt will continue rising until 2016-17, when it will peak at 85.6% of the UK’s GDP.  Only last December, the OBR estimated that debt would peak at 79.9% in 2015-16.

The economy shrank by 0.3% during the last three months of 2012, and many analysts forecast another contraction in the first quarter of 2013.   If the forecasts are borne out, the UK will be back in recession – technically defined as two consecutive quarters of economic contraction.

The decision by Moody’s to strip the UK of its triple AAA rating last month was a severe blow to Mr Osborne’s credibility.  Prior to the 2010 General Election, Mr Osborne said:

“To bring some accountability to economic policy, I have set out eight benchmarks for the next Parliament against which you will be able to judge whether a Conservative Government is delivering on this new economic model.

“So we will maintain Britain’s AAA credit rating.”

If Fitch follow suit and downgrade the UK, the pressures on the Chancellor to rethink his economic policies will only increase.