Britain's AAA credit rating in danger, economists warn

Hopes that the UK can maintain its AAA credit are fading, economists said today.

All three ratings agencies have the UK on negative outlook and with today’s figures showing the largest decline since last Spring there is more pressure on the British Chancellor George Osborne to find ways to revive the economy in his March budget.

Vicky Redwood, chief UK economist at consultancy Capital Economics, said: “The fact that the economy is contracting more than three years after the recession first ended suggests that the current policy stance isn’t working and more action needs to be taken.”

Osborne will be banking on exports and business investment to prop up the economy, but with so many uncertainties facing the recovery many economists still think the UK will struggle to meet the Office for Budget Responsibility’s forecast of 1.2% growth this year.

Lee Hopley, chief economist at the EEF manufacturers’ organisation, said the news from industry was particularly weak, with the picture for manufacturers the poorest since 2009.

However, she added: “There are some factors which might indicate that 2013 will not be as bad as 2012 – the big euro-exit risk has diminished, the employment picture is better than expected and manufacturers are continuing to look to new markets for growth.

“That said, government must hit the accelerator on getting capital projects moving and be clearer about its economic priorities to give businesses more confidence to invest for the future.”

Sterling has been softening, which is helping UK competitiveness, whilst the Bank of England’s Funding for Lending scheme is also helping to improve credit conditions.

ING economist James Knightley said: “UK employment is also looking good right now and so if these trends can all remain in place there is the platform for the UK economy to start performing more strongly as we progress through the year.”

However, Markit chief economist Chris Williamson said today’s data banged “another nail in the coffin” of the UK’s AAA rating.

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

“As such, the data pile ever more pressure on the Chancellor to seek ways to revive the economy in the March Budget.”