S&P affirms the UK’s AAA | FT Alphaville

S&P affirms the UK’s AAA

Does this look like grounds for a negative or a stable outlook on that affirmation, do you think? (Via S&P’s statement — released just as Chancellor George Osborne took to the stage at the Conservative party conference):

Although the economy has exited recession, recovery has been lackluster, with output essentially stagnating since the fourth quarter of 2010. In our view, the U.K. government’s efforts over the next few years to engineer a steep correction in the fiscal accounts will likely weigh on the economy. This is especially pertinent in the short term as households delever and banks tighten lending terms. Private consumption will be dampened by hikes in indirect taxes, a re-indexation of welfare benefits, a weak housing market, and sluggish nominal wage growth. These factors, in turn, will likely make corporations reluctant to invest in increasing capacity.

The reliance of U.K. economic growth in recent years on a limited number of sectors and regions, fueled by rising private- and public-sector debt, is an issue that the governing coalition intends to address. In our view, however, the official assumption that the private sector will quickly step in to replace the withdrawal of public spending may prove optimistic, especially given weakening external demand and underlying structural impediments to economic growth, which will likely take time to correct.

These structural impediments include low absolute levels of labor productivity, a shortage of workers with technical and vocational education, and insufficient investment in infrastructure and innovation. Addressing these issues will be likely be difficult at a time of fiscal austerity.

As a result, we expect the U.K. will post relatively modest growth rates of around 1.8% on average in 2011-2014, lower than the 2.5% forecast by the Office for Budget Responsibility…

We forecast a general government deficit of around 3.3% of GDP in calendar year 2014, using ESA 95 methodology, compared with the government’s 2.6% projection for fiscal 2014-2015. Standard & Poor’s higher estimates for the deficit are largely based on our view that economic growth will likely be lower than that forecast by the OBR…

Moreover, we note that debt levels in both the corporate and household sectors remain relatively high, at over 200% of GDP, and further falls in house prices or disposable incomes could halt the recent easing in bank loan losses, as could an eventual rise in interest rates. However, underwriting standards have tightened, with minimal new non-prime or high loan-to-value mortgage lending…

Among other contingent fiscal liabilities, we include Network Rail’s debt–equivalent to about 2% of GDP in 2011. We have also added in private finance initiative (PFI) debt. The failure of PFI project operators could, in our view, lead to government bailouts in order to safeguard the provision of important public services. Off-balance-sheet PFI projects signed by mid-2011 had a total capital value of 3.6% of GDP.

If despite all that gloom you thought it’s a stable outlook, well done!

The stable outlook reflects our expectation that the government will implement the bulk of its expenditure-led fiscal consolidation program, which we believe is likely to cause the net general government debt burden to peak at about 87% of GDP in 2013 and decline thereafter.

The ratings could come under downward pressure if, against our expectations–and perhaps in response to weakening growth prospects–the coalition government’s commitment to fiscal consolidation falters. Such downward rating pressure could stem from a reappraisal of our fiscal deficit forecasts or of our view of the government’s ability to implement its current fiscal strategy.

Readers may, of course, wish to contrast S&P’s use of S&P ratings methodology on the UK here with Danske Bank’s use of S&P ratings methodology… over here. At the same time, in CDS-land (chart via Markit)…

(Blue = UK, Green = Germany)

Related link:
Osborne reaches for middle ground – FT