Britain is edging closer to losing its gold-plated sovereign credit rating due weak growth and ballooning government borrowing, ratings agency Fitch has warned.
Fitch warned that government debt levels and lacklustre growth could threaten that top-notch grade Photo: Reuters
“The likelihood of a downgrade has increased,” Fitch said as it reconfirmed the UK’s “negative outlook” but slashed its forecast for 0.8pc growth this year to a 0.3pc decline and warned that international debt will hit almost 100pc of GDP.
The Chancellor will also miss one of his two cast-iron fiscal rules, the ratings agency added, but it did not call for more austerity measures to plug the gap.
Fitch’s decision to tolerate a breach of the debt reduction target without immediately downgrading the UK amounted to an implicit green light for the Chancellor to abandon the rule. It echoed comments this week by Sir Mervyn King, Bank of England Governor, who said that breaking the pledge would be “acceptable” if it was due to the global downturn.
The Government was quick to flag Fitch’s response as an “endorsement” of its austerity measures. “They stress that deliberately going out to add more to the nation’s credit card bill would threaten our international credibility and increase the chances of a downgrade,” the Treasury said in a statement.
Fitch said that “global economic headwinds, including those from the eurozone, have compounded the drag on UK growth from private sector deleveraging and fiscal consolidation”.
Due to the “weaker than anticipated economy”, Government borrowing is running above target and the national debt will peak at 97pc in 2016-17 on Fitch’s calculations. As a result, debt will not start falling until a year later than George Osborne had promised.
Despite recognising the rule breach, Fitch said it “assumed” the Government would stick to its existing plans and did not demand further steps to hit the target. It added that the “negative outlook”, which implies a 50pc chance of a downgrade, will not be resolved until 2014.
However, the agency stressed that the UK had “very limited fiscal space to absorb further adverse economic shocks” without losing its AAA status and warned that a downgrade “would likely be triggered” by any “discretionary” borrowing to stimulate growth.
The update came as official figures showed that Britain’s powerhouse services sector grew by 1.1pc in July, the strongest performance since May last year, prompting economists to declare that the double-dip recession is finally over.
The data appeared to confirm that slow, underlying growth is returning after second-quarter GDP was upwardly revised from an initial estimate of contraction of 0.7pc to a decline of just 0.4pc.
David Tinsley, UK economist at BNP Paribas, said: “It’s been a positive week for UK data. UK GDP was revised up, while at the same time consumer confidence and the level of mortgage approvals has risen. Also potentially significant is the easing in secured household credit availability. [The] index of services adds to the positive tone.”
Chris Williamson, UK economist at Markit, added: “The end of recession is in sight as the latest data on the service sector add to signs the UK economy rebounded strongly in July. However, it seems likely the underlying pace of growth will be modest at best.”
Economists are forecasting growth of as much as 0.7pc in the three month to September.
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