First the AAA-rated Euro bailout fund, now this. Moody’s was obviously feeling generous on Monday.
It’s kept the UK’s top rating on a stable outlook — interesting, as Moody’s clearly believes you can have austerity and keep your AAA.
From the rating agency’s announcement:
Moody’s stable outlook on the UK’s Aaa rating — implying that the rating is not expected to change in the foreseeable future — is largely driven by the government’s commitment to stabilise and eventually reverse the deterioration in its financial strength. Government debt is also well-structured, thus limiting re-financing risk. Moreover, the UK economy appears sufficiently flexible and robust to grow moderately, even in the face of the challenges mentioned above and austere fiscal consolidation.
Well, one slight quibble here — Moody’s seems to have confidence even without the full details of the UK coalition government’s cuts, which are going to be published in the Spending Review on October 20. Still, as the agency continued:
The UK’s Aaa rating is premised on Moody’s central scenario that the UK economy will maintain a moderate pace of growth over the medium term, that the primary budget balance will be in surplus by around 2014, and that the restructuring of the country’s banking sector will only incur small additional costs.
Well — there are other challenges out there, too. For example, Stephen Lewis of Monument Securities observed on Monday that many of the headwinds stem from outside the UK — a US slowdown, or debt crisis austerity in Europe.
Thus, Lewis is pessimistic on GDP growth next year, pegging it at 1.1 per cent from forecasts of 1.6 per cent. But that’ll have an uncertain effect on tax receipts all the same (emphasis ours):
This outlook will militate against the Government’s making significant progress in reducing public sector net borrowing (PSNB) next year, though this year’s PSNB outcome could well undershoot the Budget forecast. Corporation tax receipts seem set to exceed expectations, reflecting a recovery in corporate earnings and HMRC’s assiduity in pursuing claims. Later in this financial year, pre-emptive buying ahead of the VAT rate hike is likely to boost receipts.
These will tail off in the course of 2011, however, as the higher VAT rate deters spending. The danger is that the Government, having been ahead of schedule in reducing the PSNB/GDP ratio in 2010, will have fallen behind by the end of 2011. As for the public debt/GDP ratio, the flow of budgetary red ink will keep it on a rising trajectory although, at end-2011, it should not be too far from current official projections…
Then again, when you do as the ever-cheery Andy Chaytor of RBS did on Monday, and look into the latest data, the gloom is mounting:
UK data is getting worse, and quickly. I don’t want to bore you with a list but I think in these highly volatile times, it’s sometimes hard to step back and take a look at the big picture: So far in September, the PMI Manufacturing has come in at 54.3, down 3.2 points in two months. The PMI Services (extremely important for the MPC) has come in at 51.3, down 3.3 points in two months. The RICS has collapsed to -32, down 40 points in two months. We got the first increase in the jobless claims since January and the weakest retail sales report since January as well. It is not a pretty picture…
Although RBS would say that — they’re bond bulls who are counting on resumption of quantitative easing by the Bank of England.
Worth noting, though. And worth pondering how the BoE will reconcile its monetary policy with a government that increasingly looks like it’ll get a free rein at cutting, cutting — and cutting some more.
Related links:
UK government spending – FT / In depth
Clegg tells party to take ownership of cuts – FT