Schroders European Economist, Azad Zangana, comments on the recent downgrade:
"The downgrade therefore comes as no surprise, with the economy double-dipping in 2012, and is currently on the verge of a triple-dip recession. Indeed, both gilts and sterling have been under pressure since the end of 2012, as speculation of a downgrade had been building.
"Moody’s cited three key factors behind its downgrade:
1. The continued weakness in the UK’s medium-term growth outlook;
2. The implications of weak medium-term growth for the UK’s public finances, leading to higher debt;
3. And, as a consequence, the deterioration in the UK’s ability to absorb future shocks using the government’s balance sheet.
"Moody’s did however revise up its rating outlook back to stable, indicating that the UK would not be downgraded further.
"Overall, this downgrade had been on the cards for some time, and the market reaction this morning suggests there are bigger concerns out there for investors, such as the elections in Italy for example. Both Standard and Poor’s and Fitch also have the UK’s outlook on negative watch, and so we expect the others to follow suit. This could push some investors that are forced to hold ‘AAA’ rated assets to sell out of gilts, however, in a world where the pool of ‘AAA’ rated assets is shrinking, we do not expect to see much of an impact.
"The fallout of the downgrade is more likely to be felt in Westminster rather than the City, where Chancellor George Osborne has used the ‘AAA’ rating as a benchmark for economic competence. With less than a month to go before the 2013 Budget, the ‘strategic leaks’ of policy measures have been strangely absent from the news. Osborne’s own party are calling for deeper cuts in spending, with the savings used to cut taxes, while the opposition are calling for more public spending. The ideological debate on the size of government does not help the present situation. The Chancellor should take advantage of near record low borrowing costs to fund long-term infrastructure projects, but at the same time, should focus on structural reforms to boost productivity, which has plummeted in recent years."
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