The UK’s deepening recession will cost the country its cherished triple-A credit rating, leading bond investors warned after output fell 0.7 percent in the three months through June.
Leading investors said that the foundering economy, which economists had projected would shrink 0.2 percent in the second quarter, was confounding George Osborne’s ambitious austerity program and is likely to spur Moody’s to strip the UK of its top rating.
Moody’s put the UK on negative outlookin February this year.
“The data are shocking and no amount of excuses about rainfall or the Queen’s Jubileecan explain away such weak growth,” said Alan Wilde of Baring Asset Management.
“Osborne’s personal ratings for economic competency are plummeting and the credit rating agencies will be deeply concerned by today’s report ... this may well hasten a downgrade.”
The chancellor admitted the country had “deep-rooted economic problems”, but maintained the coalition was “dealing with our debts at home and the debt crisis abroad.”
Bond investors have grown increasingly wary of the threat to the UK’s triple A ratingas economic data has continued to weaken. The dismal second quarter data has markedly increased the chances of rating cuts in the future, they said.
“The UK looks vulnerable,” Nick Gartside of JPMorgan Asset Management told the Financial Times. “In terms of its rating and its safe haven status it is an anomaly.”
Moody’s and Standard & Poor's, which have both rated the UK at triple-A since 1978, declined to comment.
While affirming its stable outlook on the UK in April, Standard & Poor’s warned that “materially weaker economic growth than we currently anticipate over the medium term” could lead to “downward pressure” on the rating.
The agency forecast growth of 0.5 percent this year—a figure that will now be hard to hit.
Investors said, however, that any downgrades were unlikely to have a major effect on the UK’s borrowing costs thanks to the Bank of England’s bond buying program and its status as a haven in the European debt storm.
Standard & Poor’s decision to strip the US of its triple A rating last year did not dent investor appetite for Treasuries, whose yields have steadily declined.
The UK’s own two-year borrowing costs slumped to a record low of just 0.05 percent after the economic data were released. “As long as UK policy makers retain their credibility—and I think they will—then I don’t see why a downgrade would have an effect,” said Mike Amey of Pimco.
Nonetheless, the shrinking economy and the possibility that the UK might lose its triple-A crown has a cloud over the government. The economy is now smaller than it was when the coalition took office in 2010.
“As we warned two years ago, David Cameron and George Osborne’s ill-judged plan has turned Britain’s recovery into a flatlining economy and now a deep and deepening recession ,” said Ed Balls, shadow chancellor for the Labor party.
The chancellor and the Bank of England have announced a series of measures in recent months to underpin growth, including discounted funding for banks to lend to business and a proposal to use the government’s balance sheet to underwrite up to 40 billion pound ($61.9 billion) of new infrastructure projects.
But with credit flows between banks and businesses still impaired, there is a sense that Mr. Osborne is close to exhausting his options. The International Monetary Fund recently said he may need to relax his fiscal stance with a temporary VAT cut if things continued to deteriorate.
The chancellor insisted he would not deviate from his “Plan A” to eliminate Britain’s structural deficit by 2017.