Standard & Poor’s warns there is a one-in-three chance that it will strip the UK of its cherished AAA status within the next two years
George Osborne’s economic credibility suffered a fresh blow on Thursday when Standard and Poor’s became the third of the major credit ratings agency to put the UK’s AAA rating on negative outlook.
In a statement issued just after the London markets closed, S&P warned there was a one-in-three chance that it would strip the UK of its cherished AAA status within the next two years.
“We believe this could occur in particular as a result of a delayed and uneven economic recovery, or a weakening of political commitment to consolidation,” it said.
S&P did not call for the government to abandon its austerity plans, but it warned that the deficit-cutting strategy will continue to undermine growth.
“We continue to believe that government’s efforts over the next few years to engineer the planned correction in the UK’s fiscal accounts will likely drag on economic growth.”
It added that belt-tightening by debt-burdened consumers and weak investment by anxious firms were likely to continue to depress demand.
Ministers, including chief secretary to the Treasury Danny Alexander, have played down the significance of a ratings cut in recent days; but the chancellor has pinned his political reputation on maintaining Britain’s reputation as a “safe haven” for foreign investors.
S&P’s announcement came after Osborne was forced to announce in last week’s autumn statement that economic growth has been far weaker than he hoped even in his March budget; and he now expects to flunk his self-imposed rule of cutting the public debt burden by 2015-16.
S&P said its own calculations suggested the debt-to-GDP ratio, forecast by the independent Office for Budget Responsibility to peak just below 80% of GDP, could actually hit 100% of GDP – on its own definition – if the economic recovery continues to disappoint.
Its decision followed similar moves from the two other major ratings agencies, Fitch and Moody’s, and will ratchet up the pressure on the government over its handling of the economy.
A Treasury spokeswoman said, “it is a hard road, but the economy is on the right track.” She added, “in their assessment, Standard & Poor’s endorse the government’s ‘strong commitment to implementing the fiscal mandate’ and specifically warn against slowing ‘the pace and extent of fiscal consolidation’.”
Government insiders have also been buoyed by the fact that both the US and France have lost their AAA ratings in the past two years, without seeing their borrowing costs rocket.
David Tinsley, of investment bank BNP Paribas, said, “2013 looks like being a year when the UK could lose its AAA rating fairly comprehensively…we would be surprised if the UK got through next year without at least one downgrade, and quite possibly two or three.”
He added: “the Bank of England will continue to stand as a ‘buyer of last resort’ of gilts if the economy worsens. Nonetheless, some of the safe-haven glow of the UK is looking a bit tarnished.”
S&P’s intervention came after the chancellor defended his autumn statement before the cross-party treasury select committee of MPs.
Osborne hinted that he might consider rewriting the Bank of England’s job description, forcing it to focus on kick-starting growth, after the idea was mooted by governor-to-be Mark Carney.
The chancellor acknowledged that there was a “debate going on,” about the best way for monetary policy to support recovery.
Carney, currently governor of the Bank of Canada, has floated the idea that central banks could aim at boosting nominal GDP – economic output plus inflation – instead of tracking an inflation target, the framework followed in the UK since the early-1990s.
Proponents of a nominal GDP target argue that it would increase the pressure on policymakers to take aggressive action to re-start growth, instead of fretting about unleashing inflation.
The chancellor said he currently had, “no plans,” to change the Bank’s remit; but commented that there is “innovative stuff happening around the world.”
“There is a debate going on. I’m glad the future Bank of England governor is part of that debate”.
It was announced on Thursday that Carney, who will take over from Sir Mervyn King next summer, will himself appear before the select committee on 7 February next year. He is expected to be questioned about whether the Bank’s remit should be shifted to reflect the lessons of the economic crisis.
Osborne told MPs: “It’s totally to be expected after everything that has happened to the international economy, and indeed to the British economy over the last four or five years, that there is a debate about the future of monetary policy.” However, he stressed that there would need to be a “pretty strong case” for any change.
One of the nine members of the Bank’s monetary policy committee echoed that cautious note yesterday. Paul Fisher, executive director of markets at Threadneedle Street, said the “real debate” was not about the technicalities of specific targets, but, “what should policy be doing in the current environment.”