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Ruth Lea, Economic Adviser to the Arbuthnot Banking Group

The downgrade in credit rating was all but inevitable, as the British economy continues to flounder

Ruth Lea (pictured), Economic Adviser to the Arbuthnot Banking Group, discusses the downgrade to Britain’s debt rating, the latest public finances data and the Bank’s February Inflation Report.…

Moody’s downgraded Britain’s sovereign debt rating from Aaa to Aa1, which was expected. Britain’s public finances are, if anything, deteriorating. But in a world where Germany and Canada are the only major economies to retain their “triple A” status, Moody’s assessment that the UK remains highly credit-worthy is surely as satisfactory an assessment as can be expected under current circumstances.
The January PSNB data were better than expected and, even after allowing for APF receipts of GBP3.8bn, were still a tad better than in January 2012. But taking the first ten months together, the picture is less encouraging. The IFS estimates that, if present trends are continued in February-March 2013, the underlying PSNB (excluding the effects of the Royal Mail transfer and the APF receipts) could be GBP127-128bn in FY2012. This is GBP6-7bn higher than in FY2011 (GBP121bn) and GBP7-8bn higher than the OBR’s December forecast for FY2012 (GBP119.9bn). The ONS recently announced that, of the GBP11.5bn APF receipts expected in FY2012, only GBP6.4bn may count against the deficit. If the OBR follows this guidance, then the actual PSNB for FY2012 may be GBP92.5-93.5bn, some GBP12-13bn higher than the GBP80.5bn forecast in December.   
The Bank downgraded its GDP growth forecasts and increased its CPI inflation forecasts in February. The Bank now projects that CPI inflation will stay above the 2% target until the second half of 2015, partly because of “administered and regulated” price increases. Monetary policy will not, however, be tightened. Indeed the Governor voted for more QE at the February MPC meeting. The pound has weakened about 6% since the beginning of the year, providing a competitiveness boost. 
Ruth Lea said “the cumulative borrowing figures for the current financial year do not make for comfortable reading. Not merely will the PSNB overshoot the OBR’s December forecast, but the “underlying” PSNB could be GBP6-7bn higher than last year. In addition, the Bank’s latest forecasts show weaker growth and higher inflation. All in all, Moody’s downgrade to Britain’s debt was all but inevitable.” 

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