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Following similar downgrades for the USA and France, the UK has become the next major economy to have its credit rating downgraded. The decision by credit ratings agency Moody’s to downgrade UK sovereign debt on the 22nd of February 2013, while not wholly unexpected, has highlighted the fact that the UK may be losing its safe haven status. Reducing the UK’s domestic and foreign currency government bonds from their prized triple-A rating to Aa1 (for the first time since 1978), Moody’s explained that while the outlook for the country was still stable, medium-term growth prospects remained weak and that the agency expected this to continue into the second half of the decade. The downgrade essentially means that Moody’s is not as confident about the overall outlook for the British economy, however, the country’s actual credit worthiness has not come into question and the UK is not likely to default on its debts. In line with this outlook, Euromonitor does not expect real economic growth to return to pre-crisis levels until at least 2018.
The increasingly controversial austerity policy being followed by the government also came under fire from Moody’s, which cited “the UK’s high and rising debt burden” as a key challenge to the fiscal consolidation programme as well as the country’s ability to withstand any external shocks over the coming years. The announcement caused the pound to fall to a two and a half year low against the dollar as of 25th February 2013. The relative weakness of the pound paired with the downgrade will have widespread implications for the UK in 2013, not least by underlining the fact that relentless austerity measures are hindering the British economy.
The biggest implications of the downgrade will undoubtedly be political as it reignites the debate surrounding the efficacy of austerity policies when trying to kick-start economic growth and fend off the threat of a triple-dip recession.
While the weak currency will make exports more competitive, many hope losing the triple-A rating will be the wake up call needed for the government to start implementing some counter-cyclical, expansionary fiscal policies.
Moody’s stripping the UK of its triple-A credit rating isn’t a major disaster for the British economy, the real disaster is the persistent austerity stifling economic growth. For 2013, Euromonitor International predicts we will see real GDP growth of just 0.7% in the UK, while public debt as a percentage of GDP will almost certainly exceed 90.0%.