At least one of the three main credit ratings agencies expected to downgrade UK’s status as experts predict tough 2013
Britain is expected to lose its AAA credit rating this year, dealing a blow to George Osborne’s defence of deep spending cuts as the key to retaining Britain’s status with global investors.
Many economists predict at least one of the three main credit ratings agencies – Moody’s, Fitch or Standard & Poor’s – will declare the UK a bigger lending risk in response to the chancellor’s admission in the autumn statement that austerity will run for at least eight years, until 2018, rather than the original five.
Those same economists largely agree that in a world where most developed countries have found life tough going, there will be little impact on the UK’s creditworthiness. Like the US and France, which have already seen their pride dented by a demotion to AA, the UK will still be a safe haven for foreign cash, and thereby enjoy relatively low interest rates.
But lower growth and bigger borrowing add up to a greater risk that the UK will find 2013 tougher than expected.
All the major forecasters have downgraded growth for the coming year, including the Treasury’s own Office for Budget Responsibility. The OBR’s most recent outlook put growth in 2013 at 1.2% – down from the previous prediction of 2%. Not until 2017 does the trend return to a point where unemployment comes down in any significant way.
Part of the downgrade in growth stems from expectations of lacklustre investment spending by business. Without investment in new equipment, the economy is likely to suffer over the longer term. Osborne has promised a rise in public investment this year, partly to make up the difference, but only enough to make up a quarter of the total he cut in 2010.
In budget terms 2013 will be characterised by social security cuts, which are due to take effect in earnest after an initial focus on tax rises (the increase in VAT to 20%) and job losses in the public sector (more than 700,000 so far).
Middle income families with at least one parent paying the higher tax rates will lose some or all of their child benefit. From April cuts in disability benefits and housing benefit will slice around £3bn from the social security bill. Tax credits will also be squeezed, with many people finding they are no longer eligible or suffering a cut in income.
The UK may be helped by a resurgence in global economic growth. The Organisation for Economic Co-operation and Development predicted in its twice-yearly economic outlook that the global economy will expand 3.4% in 2013 – up on 2.9% in 2012. Unfortunately almost all this expansion in output will take place in the far east and Africa, where UK exports have declined to a trickle. The UK’s biggest market, the EU, will remain in the doldrums and the US will expand, but without breaking sweat.
There was a time, back in the crisis days of 2009, when global summits sought to recalibrate the world economy and get it moving more quickly, particularly to create employment. The International Monetary Fund is among many major institutions to warn national governments that they are pursuing the type of austerity policies that lead to lower, not higher growth.
Russia is host to the G20 club of countries that rescued the world in 2008 but has since found little purpose. Russia, bogged down in the Syrian war and gas supply disputes eastern Europe, is not seen as capable of breaking the deadlock.
Britain will host the G8 in June. This meeting of the major economic powers has greater potential to make decisions, especially in respect of the banking system that brought the world to its knees. Tougher regulations are on the way and there are deep divisions over how fast to implement them. Go too quickly and regulators risk turning banks into zombies, unable to move or think for themselves. Slacken the regulatory knot, and they will lend recklessly again.
Yet it is the G20 that has taken the lead on banking regulation in an attempt to get developing country members to sign up. The trouble is that countries without big banks want financial institutions bound by strict rules while those with “systemically risky” banks are more ambivalent.
The UK, which has borrowed about 500% of its annual national income, mainly through reckless banks, is at the sharp end of this debate. And it is that debt that will continue to weigh on the economy.
Banks are cutting their losses at the expense of their ability to lend. The Bank of England is likely to print more money in 2013 to offset the effect through its quantitative easing programme, but it is unlikely to alter the current trajectory, where the UK is stuck on a path of low growth with London, buoyant on a wave of foreign money, increasingly divorced from the rest of the country.