A leading asset manager has claimed that the UK’s coveted AAA credit rating could potentially be cut as the country cannot stimulate the growth required to prevent it.
Legal & General Investment Management (LGIM) has said that the triple-A rating is at ‘severe risk’ over the next two to three years because government debt is on an ‘explosive path’.
According to James Carrick, an economist with LGIM, the UK is on the edge of a recession. ‘The UK’s debt dynamics are unstable. Unless and until we see a magic rebound in the private sector, we are stuck’. He said.
Because of the European debt crisis LGIM believes that the official growth forecasts of 2.5% in 2012 and 2.9% in 2013 are not realistic.
Mr Carrick went on to say that to meet its growth targets the UK would need to have a massive record breaking private sector boom, not just for one year but for four consecutive years.
He also said that any stimulus measures taken by the government would help growth but would need to be at the level of about Â£17 billion a year. This though would just then ‘hasten’ any credit rating downgrade.
Mr Carrick said: ‘If Osborne sticks to Plan A we will not be downgraded in the next six months but in the next two to three years there is a severe risk.’
He also added that the Bank of England’s Monetary Policy Committee will come under increased pressure to enlarge the QE programme even though it remains unclear as to how effective the policy is at kick-starting a true recovery. Many still argue that the bank should be targeting the stimulus by lending direct but so far the bank has said that a move like that is outside their remit.
‘The Bank does not want to get its hands dirty by picking winners and losers, so they are for money to trickle down through QE. While they are doing that, unemployment rises, repossessions rise and there are more bad debts.’ Said Mr Carrick.