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Standard & Poor's Ratings Services kept a negative outlook on the United Kingdom's AAA rating, reiterating that the country's new government faces a number of challenging spending decisions.
The ratings agency also noted medium-term economic forecasts for the European nation are less optimistic than the assumptions underlying its budget. It added that there was still a material risk that the U.K.'s net general government debt burden may approach a level incompatible with the highest investment-grade rating.
Still, S&P said the coalition government, which took office following a May election, has set out what S&P views as a strong framework for fiscal consolidation in its June budget plan. The rating was also supported by the country's resources, diversified economy, ample fiscal- and monetary-policy flexibility and adaptable product and labor markets.
However, the U.K. faces challenges. They are mainly due to what S&P believes to be a substantial structural deterioration in public finances between 2007 and 2009, with gross general government debt increasing by 23% of gross domestic product, more than in most other AAA-rated sovereigns. Yet, significantly supporting the rating is the newly elected Conservative/Liberal Democrat coalition government's economic policy priority to close the fiscal gap.
"The negative outlook reflects the potential of a downgrade if the government does not implement its challenging fiscal consolidation program on the scale currently planned," said analyst Trevor Cullinan. That outlook was first put on the U.K. in May after the lack of one party winning outright control of Parliament.
Earlier Monday, the U.K. reported its economy expanded an unrevised 0.3% in the first quarter, while revised data showed the recent recession was deeper than previously thought. The data also showed that growth was still heavily dependent on government spending in the first quarter, with consumption falling. U.K. markets fell immediately after the data.
Copyright 2009 Dow Jones Newswires
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