A downgrade of Britain’s top notch credit rating is potentially unavoidable because the country can not grow out of its debts, a leading asset manager has claimed.
By Philip Aldrick
6:26PM BST 12 Oct 2011
Legal & General Investment Management said “the UK’s credit rating is likely to be reviewed in the coming years” as it becomes clear that the Government will miss its growth forecasts and fall back into recession.
The warning will come as a blow to George Osborne, who has staked his reputation on the UK retaining its AAA rating despite emerging from the recession with the biggest budget deficit in the G20.
James Carrick, economist at LGIM, said that stimulus spending of about £17bn a year would help lift growth but “hasten” any ratings action. “Under all scenarios, we think the Chancellor will miss his projections,” he said.
“We expect the debt-to-GDP ratio to remain on an explosive path no matter what the Government does. [As a result] ratings agencies might negatively review the UK’s AAA sovereign rating in coming years.”
Mr Carrick said the Government can not meet its growth targets because they require the “biggest private sector boom ever”. To compensate for the largest fiscal squeeze since the Second World War, the private sector will have to grow “not just at its fastest rate in one year, but for four in a row”.
Singling out the stricken banking sector, he said: “It’s very difficult to get a boom when credit is restrained.”
The Government currently expects growth of 2.5pc next year and almost 3pc for the three subsequent years. According to LGIM, growth is more likely “to be around 0.5pc” a year. Mr Carrick added: “A recession appears likely.” He expects the economy to contract in either the final three months of this year of the first three of 2012, with a high chance of two negative quarters running.
The Government will miss both its targets of eliminating the structural deficit and having the debt-to-GDP ratio falling by 2015 because tax receipts will decline as unemployment remains high.
LGIM’s analysis jars with Standard & Poor’s. The rating’s agency reaffirmed Britain’s AAA rating earlier this month despite acknowledging that growth will be slower than forecast. It warned against abandoning austerity.