Howard Archer, IHS Global Insight

The UK has had its credit rating cut, losing its top AAA status. Leading economists have been giving their reaction.

This will come as little surprise, and as such may actually mean that there is little negative economic impact from the move. The negative impact for the UK is also likely to be limited by the fact that there are now very few countries left that have a AAA rating from all of the credit rating agencies.

The markets have been increasingly pricing-in the loss of the UK’s AAA rating for some time, so Moody’s actual decision to act may actually not have much of an impact – although the pound will be particularly vulnerable and lost further ground on the announcement of Moody’s decision.

But the UK’s loss of its AAA rating is an embarrassment for the government, which will undoubtedly be seized upon by its critics and opponents. And it does focus attention on the UK economy’s extended and ongoing serious problems.

Moody’s justification for the loss of the UK’s AAA rating highlights the problems currently faced by the UK economy and is hard to argue with.

Moody’s believes that extended weak growth poses a serious challenge to the government’s fiscal consolidation efforts.

Moody’s concludes that the combination of extended weak growth, a higher debt level and less certain policy implementation means that there is an “erosion of the shock-absorption capacity of the UK’s balance sheet”.

In truth the inevitability of downgrading of UK debt… by one or all three of the big rating agencies has been on the cards for so long that when it eventually did in the form of Moody’s move last night it felt rather like a damp squib.

From an equity market viewpoint the move to downgrade UK debt by one very small notch to Aa1 will most likely be seen as a relief. Let’s hope now that the other two rating agencies follow suit so that the air will be cleared.

The view reasoned by Moody’s to cut the UK debt rating is absolutely right – we are light years away from returning to growth.

Yes, we can lay some foundations for the type of economy that we want to have in the future and that we believe really will provide sustainable long-term growth – a balanced economy and one that is based on a good mix of manufacturing, service and consumer spending as opposed to one that relied solely on a policy of borrow and spend.

The bottom line is that this small downgrading of UK debt by Moody’s is not a recipe for policy change. They are merely catching up. If the UK deficit is to be brought down and the task of reducing the debt mountain begun, George Osborne has no option but to stick to his guns. We are not the US and unlike them we cannot live with levels of unsustainable debt.

In many respects it comes as little surprise that Moody’s have chosen to strip the UK of its AAA rating. The UK has a similar gross debt to GDP ratio as France and the US, both countries who have lost their AAAs in recent history. Moreover the rate of increase of the UK debt is still alarmingly high.

Moody’s have previously highlighted some UK strengths, in terms of the maturity of its debt and its track record in delivering deficit reduction but this was not enough given the scale of the consolidation challenge against the pretty miserable growth outlook.

We don’t expect much market impact from the downgrade – it was widely expected. It is small consolation that Moody’s removed the negative outlook on the rating. But this all comes at a time of poor news flow and highlights the UK’s vulnerabilities.

What next? We expect Fitch to downgrade the UK shortly after the March Budget. S&P will most likely follow later.

The bottom line is that the UK needs to find some growth to raise tax revenues. If it cannot do this in the next year or two the situation on the finances will get very worrying indeed.

For more on this story go to:

http://www.bbc.co.uk/news/business-21558772