UK's AAA credit rating under threat

The UK economy may have dug itself - just - out of recession. But it could be stripped of its coveted Triple AAA credit rating within a few months.

Credit rating agency Moody's is worried about the UK's ability to power forward thanks to a weakened tax base, high debt levels, plus on-going exposure to the Eurozone crisis. How likely is a demotion?

Time needed

Much depends on Chancellor George Osborne. If he can pack his Autumn Statement - scheduled for 5 December - with nifty, inventive ideas to push growth forward then credit rating agencies like Moody's may be persuaded to give him more time.

Moody's is not alone in its pessimism of the UK's situation. Bank of England governor Sir Mervyn King has warned that the UK is at risk of slipping back into recession. King predicts 2013 GDP growth will slip to +1% from +2% originally forecast while inflation is unlikely to fall back until mid-2013.

"Although these challenges are currently reflected in the negative outlook on the UK's sovereign rating," Moody's said in a statement, "Moody's will revisit the AAA rating and outlook in the first few months of 2013 to assess the impact of these challenges and of the government's upcoming autumn Statement."

Life support

In the UK's favour, says Moody's is a diversified, competitive economy plus a "flexible" labour force. But some consistency is needed. The UK economy has zigged and zagged through 2012: a sodden Spring depressed high street retail sales while Q3 was given a temporary lift from the Olympics. Output could even shrink in the final quarter.

Another concern is the curse (or help, depending on your view) of low interest rates. While low rates keep the lid on many mortgage payments it also helps keep some UK companies - the so-called 'zombie' businesses that deserve to go bust - on life support, making real change harder, more drawn-out.