In the wake of this week’s release of British GDP data economists and bond strategists have revised estimates regarding the nation’s credit rating. After it was announced on Wednesday that in the second quarter the economy contracted by 0.7 per cent (faster than that of the tumultuous euro-zone and lower than even the more pessimistic estimates) international news agency Reuters conducted a poll of 60 economists to gauge their opinions on what could be coming next.
Although none of the polled economists expected any developments when the Monetary Policy Committee meets on August 2nd, one in three did feel there could be a big change on the horizon. The average results showed that 35 per cent of those questioned believe Britain could lose its coveted AAA credit rating. The probability that Britain will be downgraded in the near future ranged from 5 to 80 per cent, giving an average of 35. This is up 10 per cent from a similar poll conducted in March.
Nick Stamenkovic, a micro strategist at RIA Capital Markets explained his view on news stating: ‘A worsening growth outlook threatens [Britain’s] fiscal goals. The risk of losing AAA status is rising.’
A 33 per cent probability was assigned to the same event in a consensus of large British banks, but non UK respondents felt the likelihood was greater, giving a pessimistic probability of 40 per cent.
Theoretically, an AAA rating aids low governmental borrowing rates by assuring investors of definite debt repayment. If Britain were to be downgraded the pressure on Chancellor George Osborne regarding his austerity measures would intensify significantly. It is therefore interesting to note that of those economists polled only 16 of 43 felt that Osborne’s contentious fiscal austerity programme should be relaxed. This result may seem surprising when you consider that in the three months to June the British recession has deepened. However, the credit ratings agencies Moody’s and Fitch Ratings gave the British AAA debt rating a negative outlook, and warned that if fiscal policy is loosened it could be lost within a few years.
The vast majority of those polled felt that if a rate change occurred it would not be until April 2014 at the earliest.