UK AAA rating at risk, says Moody’s

Credit rating agency Moody’s says the UK’s coveted AAA sovereign credit rating could be at risk if slow economic growth impacts the government’s deficit reduction plan.

Fears are mounting that if growth does not keep up with government expectations then it would not be able to sustain its measures to slash the deficit.

Moody's issued a statement saying: "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 follow Chancellor George Osborne’s revision of domestic growth forecasts for 2011 down to 1.7 per cent in this week’s Budget. Moody’s believes this outlook is optimistic and has reduced its own forecast from 2 per cent to 1.6 per cent.

The Office for Budget Responsibility (OBR) has also cut the growth forecast for 2012 from 2.6 per cent to 2.5 per cent.

Moody’s had previously said that the AAA rating was safe thanks to the government’s austerity measures.

However, the revised figures from the OBR have raised doubts over whether the highest credit score can be maintained and prompted Fitch, another rating agency, to issue a warning.

"The medium-term economic forecasts still appear relatively optimistic. If the economic recovery proves weaker than projected, future Budgets may require additional measures to ensure that the government meets it ambitious fiscal targets," it said.

The National Institute of Economic and Social Research agreed that growth forecasts were generous despite the downward revision.

"We expect a more subdued recovery – GDP growth of 1.5 per cent in 2011 and 1.8 per cent in 2012 – due, in large part, to very weak consumer spending growth," it said. "Such poor consumer spending growth is expected because of declining real incomes this year and a weak housing market both this year and next."

The credit risk is bad news for UK gilt investments according to Graham Toone, head of research at AFH Wealth Management.

"Moody’s comments add to our existing concerns that 10-year gilts offering typical yields of 3.6 per cent are simply not attractive in a high inflationary environment," he explained. "Now that the threat of a credit risk has been added, we don’t have any confidence at all in investing in the area."

Discouraging figures for UK retail sales will serve only to compound fears. Data from the Office for National Statistics (ONS) revealed that total sales decreased by 0.8 per cent between January and February while sales in food stores were down 2.2 per cent on last year’s figures.