The euro zone crisis has distracted attention from the “dire state” of the U.K. economy and the country is set to lose its AAA credit rating, according to Strategy Economics.
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St George's Flag & Houses of Parliament
“It is now simply a matter of time before one of the big agencies gets around to cutting the rating,” Matthew Lynn, founder of the firm, warned.
The British government has staked its reputation on maintaining the rating and Chancellor of the Exchequer George Osborne has clung to it as a key sign of the country’s economic strength.
Yet, no less a figure than the former U.S. Treasury Secretary Larry Summers has warned of a “lost decade” for the U.K. unless it does more to promote growth.
British business leaders are also putting pressure on the government to do more to stimulate growth, whether through creating a new British business bank, which could be announced next week, or job creation schemes.
“As growth stalls, the deficit rises, and government borrowing tick relentlessly higher it is inconceivable that the U.K. can remain in the small group of Triple-A rated countries much longer,” Lynn wrote in a report on Wednesday.
The current coalition government, which is not particularly popular, could come under further pressure next week when the high-profile political party conference season kicks off.
Lynn argued that a cut to the rating could lead to the government’s downfall.
Ratings agency Fitch said last month that the U.K. could lose its credit rating if the government were to deviate from its “Plan A” for deficit reduction.
There is plenty of uncertainty for investors and economic data has painted a mixed lately. The Bank of England’s Monetary Policy admitted as much (in rather dry fashion) in this month’s minutes when they said of inflation: “It was not sensible in such an environment to ascribe a high probability to any particular short-run projection” – or, in non-economist language: “We don’t really know what’s going to happen.”
U.K. gross domestic product (GDP) contracted 0.5 percent in the second quarter as the economy entered a double-dip recession. But data released this month showed business confidence was higher than thought. Services PMI figures for August showed the business activity index rising to 53.7 from 51.0 in July and the average of business activity, new businesses and employment improving.
