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UK 'Not Much Room for Maneuver': Fitch

Vladimir Zakharov | Flickr | Getty Images

The bad news for the U.K. keeps getting worse. Last week, a second ratings agency downgraded the country's triple-A rating and on Monday, data showed British household spending is declining.

The downgrade by Fitch Ratings on Friday is another humiliating blow for Britain's finance minister George Osborne, an advocate of austerity measures in the face of flatlining growth who is facing increasing criticism.

"The U.K. no longer adds up to a triple-A rating, that is why we downgraded it on Friday," David Riley, global managing director of sovereign ratings at Fitch Ratings, told CNBC's "Worldwide Exchange" on Monday.

"The bottom line is that the U.K. level of national debt has more than doubled, and that is just not consistent with it retaining its triple A-rating... the government has slowed down the pace of deficit reduction and the deficit is not really changing."

Riley said the downgrade was not as a result of Osborne's austerity measures, but added that the U.K. had little scope for significant fiscal stimulus.

"Can the U.K. go on a major fiscal stimulus exercise? We do not actually think there is much room for maneuver for them to do that, at least from a ratings perspective," Riley said.

"The actual evidence that if you do tax cuts you automatically get more revenue is not very strong, otherwise lots of governments would be doing that."

However, Bill Gross, manager of the world's largest bond fund, Pimco, said efforts by Britain and much of the euro zone to cut debt with severe austerity measures risk stifling economic recovery.

"The U.K. and almost all of Europe have erred in terms of believing that fiscal austerity in the short term is the way to produce real growth. It is not," Gross told the Financial Times newspaper on Monday. "You have got to spend money."

From Bad to Worse

The news could get worse this week as a spate of economic data is due, analysts told CNBC on Monday. Advanced first quarter gross domestic product data for the U.K. is due on Thursday and most economists expect the country to show little to no growth.

"We're going to get a flat or negative reading, and I think that will reignite the austerity debate because the U.K.'s economy is not going anywhere," Joe Rundle, head of trading at ETX Capital, told CNBC on Monday.

"We need some sort of stimulus to get investment into the economy rather than talking about what the government's doing. We need some fiscal stimulus but it's a really difficult thing for [U.K. finance minister] George Osborne to go out there and cut taxes and make it easier for investment to come into the country while he's cutting back on welfare," Rundle told CNBC Europe's "Squawk Box."

"This week is likely to provide a timely reminder of the U.K.'s current challenges," Tobias Blattner, European economist at Daiwa Capital Markets, said in a note on Monday.

"But the data highlight of the week will be the first estimate of first quarter GDP, on Thursday. While expectations are for a modest expansion at the start of the year, we think GDP contracted by 0.1 percent quarter on quarter," Blattner added.

Other data due on Tuesday are the latest public finance figures for March and on Wednesday, the Confederation of British Industry (CBI) releases its latest industrial trends.

The week's economic updates follow the country's credit downgrade by Fitch Ratings on Friday. The second agency to strip the U.K. of its prized AAA rating, Fitch cited a weaker economic and fiscal outlook.

Sir Thomas Harris, vice president of Standard Chartered bank, told CNBC that last week's credit downgrade had been a "realistic" reflection of the economic woes facing the U.K.

"Clearly the downgrading of the rating was a disappointment and particularly for the Chancellor [George Osborne] but I think it is probably a realistic reflection of the difficulties the British economy is having in adjusting to this process of massive deleveraging of the household sector and government sector," Harris told CNBC Europe's "Squawk Box."

British Households Worried

The gloomy outlook follows data from Markit which showed that British household spending fell in April due to worries about the country's economic outlook and higher living costs.

The survey of 1,500 Britons' showed that household finances deteriorated in April at a faster pace than in March as incomes fell and living costs rose, and households expected the squeeze to continue, reducing their ability to spend and support the economy.

Markit said on Monday that its headline Household Finance Index fell to 37.7 from 39.3 in March, sinking further below the 50 level that would mark no change compared with a month ago. That is the first drop in the index since December.

Thirty-two percent of households said their finances worsened this month, while only 8 percent reported an improvement. Almost 42 percent expected to be worse off in 12 months' time versus the 27 percent who thought they would have more money to spend.

Consumer spending generates about two-thirds of Britain's gross domestic product.

-By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt

Reuters contributed reporting to this story.

Contact Europe: Economy

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