Weak pound and a shrinking economy put UK’s rating at risk

Trip'dip fears will haunt some British businesses. Picture: Getty
Trip'dip fears will haunt some British businesses. Picture: Getty
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Britain looks odds-on to lose its coveted AAA credit rating following confirmation that the economy shrank by more than expected at the end of last year, say analysts.

Although the London market shrugged off forecasts of another lost year of growth in 2013, there were warnings that the world’s ratings agencies would be less generous.

Markit chief economist Chris Williamson said the 0.3 per cent decline in the fourth quarter banged “another nail in the coffin” of Britain’s top-notch credit status, while bookmaker William Hill cut its odds on a downgrade by at least one of the major agencies to 2/5.

Williamson added: “At the moment it remains too early to tell if the economy will triple-dip, but the latest numbers have greatly increased the risk of a new recession and a downgrading of the UK’s AAA rating.”

Jeremy Cook, chief economist at foreign exchange company World First, said the downgrade was expected and, like the poor economic figures, had been priced in to the pound’s value.

“Sterling markets have been positioning for a weak figure over the last couple of weeks, and a weak figure is exactly what we have got,” he said.

“It is likely that this will be the final straw for our AAA credit rating, and I expect a downgrade by at least one agency to materialise by the end of this quarter.”

However, he said the impact would mostly be political, and may actually support the pound.

“I would emphasise that a downgrade will not prompt a ‘sterling crisis’ or a crash in gilts. In fact, we should look at it as a positive, as it alleviates one form of short-term uncertainty that has plagued the pound for the past few months.”

The FTSE-100 index of top shares barely slowed its new year rally, adding 19.5 points to a new four-year high of 6,284.5.

Unlike Britain, other major economies have gained momentum in recent months – especially the world’s two powerhouses China and the US – and investors have been favouring FTSE-100 stocks because of their global exposure. However, even the more UK orientated FTSE-250 was higher yesterday, as the prospect of ongoing weakness in the pound would support exports and aid domestic producers facing foreign competition. The economy’s failure to grow also increases the likelihood that the Bank of England will start pumping money into the economy again after halting its programme of quantitative easing in November.

Economists remained divided on the prospects for the UK economy in 2013. Scott Corfe, of the Centre for Economics and Business Research, thinks that in some respects it could be more challenging than last year.

“The Olympics, the 5.2 per cent uprating of benefits and increased real-terms government spending – despite all the talk of austerity – all propped up growth last year,” he said. “This year, with no special events, sluggish growth in welfare payments and austerity commencing in earnest, growth – at least from the consumer-and-government side – will not be easy to come by.”

However, others pointed to the easing of the eurozone crisis and improving employment figures at home and said the recovery should gain momentum as the year progresses.