LONDON – Credit ratings agency Moody’s Investors Service downgraded Britain’s government bond rating one notch from the top AAA to AA1 on Friday, saying sluggish growth and rising debt were weakening the country’s medium-term outlook.
Treasury chief George Osborne said the blow only redoubled his resolve “to deliver our economic recovery plan,” based on deep spending cuts.
Moody’s said “subdued” growth prospects and a “high and rising debt burden” were weighing on the British economy.
The agency said rising debt meant “a deterioration in the shock-absorption capacity of the government’s balance sheet, which is unlikely to reverse before 2016.”
It said, though, that “the U.K.’s creditworthiness remains extremely high,” and its outlook was stable.
Moody’s said that “a combination of political will and medium-term fundamental underlying economic strengths will, in time, allow the government to implement its fiscal consolidation plan and reverse the U.K.’s debt trajectory.”
For the British government, the move was unwelcome but not unexpected. All three of the big rating agencies – Moody’s, Standard & Poor’s and Fitch – had placed Britain’s rating on negative watch, as the economy continues to struggle.
The Conservative-led government is cutting $80 billion in spending through 2015 in a bid to slash the national debt, which stands at more than 1 trillion pounds, more than 70 percent of GDP.
Moody’s said it expected that level to peak at just over 96 percent of GDP in 2016.
The U.K. emerged from a nine-month recession in the third quarter, when GDP grew by 0.9 percent. But the economy contracted by a worse-than-expected 0.3 percent in the last three months of 2012.