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Standard & Poor's reaffirmed the UK's sovereign debt rating as AAA yesterday, prompted in part by what the rating agency described as the Government's "strong framework for fiscal consolidation." But the agency also warned that a "number of large and politically challenging spending decisions" are still to be reached that meant there was "still a material risk" that UK government debt could reach levels which would be "incompatible with the AAA rating."
The agency added that it could upgrade the UK's rating from a negative to stable outlook "if this autumn's spending review is agreed in a manner consistent with the 2010 Budget projections, and early success in its implementation suggests to us that the Government debt burden would peak in the next three years and then begin to ease as per the Budget forecasts."
The S&P announcement came as economists expressed relief that the official growth figures delayed from last week – a highly unusual move – contained no nasty surprises, though there were plenty of warnings elsewhere about the fragility of the housing market.
The Office for National Statistics (ONS) confirmed that the economy expanded by 0.3 per cent over the period from January to March. An upward shift in its figure for government spending was, more ominously, balanced by a downward revision in its estimate for exports, which fell by 1.7 per cent over the period – despite the 25 per cent depreciation in sterling in recent years. The weakness of the UK's main export market, the eurozone nations, seems to be mainly responsible for the sluggish growth in trade.
Historically, the ONS now says that the depth of the UK recession was worse than previously thought – a peak to trough drop in output of 6.4 per cent, rather than 6.2 per cent, though either would be the worst slump in three quarters of a century.
Standard & Poor's blamed a "substantial structural deterioration in public finances between 2007 and 2009" for the current difficulties.
"We view the fiscal challenge facing the UK government as a formidable one. Based on our 2010 forecasts and under our assumptions of a 4 per cent interest rate and nominal GDP growth of 4 per cent annually, we estimate that an adjustment in the general government primary balance of close to 8 per cent of GDP will be necessary to stabilise the general government debt burden."
It added: "The negative outlook reflects the potential of a downgrade if the Government does not implement its challenging fiscal consolidation programme on the scale currently planned. A slackening of that effort, in our view, could put the UK's net general government debt burden on a trajectory that would be incompatible with a AAA rating.
"Conversely, we could revise the outlook back to stable if this autumn's spending review is agreed in a manner consistent with the 2010 Budget projections."
One weakness S&P predicted is that consumers paying off debt will hold back spending and the recovery. For now, however, the British consumer is still active, the British Retail Consortium (BRC) said yesterday. UK retail sales values rose 1.2 per cent on a like-for-like basis from June last year, "mainly explained by good weather and earlier summer clearances."
The BRC added that the World Cup had a limited effect. "Barbecue products, salads and ready meals were in big demand, but TVs were really the only football-related item that generated significant spending. Other items, flags and souvenirs, were high-profile but relatively low value," it said.
from London, for Independent minds