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UK credit rating under threat should economy slip into third dip

Global credit ratings agency Moody's has warned that the UK is at risk of losing its AAA status should the economy slide into a triple-dip recession.

The agency's comments follow the Bank of England's decision yesterday to slash its growth forecast for 2013 to 1%.

The UK could struggle to raise revenues in a more sluggish economic environment, making the task of cutting the deficit more difficult.

Moody's met with Chancellor George Osborne on Wednesday as part of the agency's annual assessment of the British economy. The agency said it will be closely monitoring Osborne's strategy of balancing economic growth with deficit reduction.

According to a statement from Moody's, they are most concerned about Osborne achieving this balancing act while contending with "weaker economic prospects as well as by the risks posed by the ongoing euro area sovereign debt crisis".

"The UK government's most significant policy challenge is balancing the need for fiscal consolidation against the need for economic stimulus," it said.

The cut to the UK economy's credit rating could happen as early as January, if growth appears to be worsening or if Osborne veers off course on his timetable for cutting the deficit, Moody's warned.

The 5th of December is a key date when Osborne releases his Autumn Statement. Moody's will then assess the speed of the deficit reduction, the growth outlook and the most importantly, the likelihood that the debt to GDP ratio will start to come down over the next three to four years.

However, a little more upbeat, Moody's also said the UK's AAA-rating is supported by "significant structural strengths" including "very favorable debt structure".

"The fact that the country has a large, diversified, highly competitive economy, a very flexible labour force, and its track record of structural reform," were other positives, read the statement.

Moody's put the UK on 'negative watch' in February this year due to concerns over the impact of the credit crisis, along with France and Austria. At the time the Chancellor said the warning came as a "reality check" for Britain.

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