Ratings agency Moody’s downgraded the UK’s coveted AAA credit rating on Friday. The continued weakness of the UK economy and its future outlook were cited as one of the main reasons for the downgrade. The government’s failure to tackle the huge budget deficit has become a major issue and little progress has been made despite increased austerity measures.
Whilst it was not directly mentioned, George Osborne’s raid of the £35 billion surplus generated through the Bank of England’s austerity programme is a major cause of concern. It both threatens the Bank’s independence and raises questions over the UK monetary policy.
Mark Carney, the new governor of The Bank of England has recently indicated that the Bank will relax its inflation target in order to focus on growth for the UK economy. The Bank has struggled to meet the inflation target of 2% for the past two years. Inflation is expected to rise to 3.5% next year according estimates released by the Bank, which normally err on the side of prudence. All the signals suggest that we can expect rising costs in 2013. The credit downgrade is likely to increase the cost of borrowing in the UK and investors are beginning to lose confidence in the UK economy. With both the US and Europe showing some signs of recovery, Sterling is beginning to lose ground against the Dollar and the Euro. A Sterling devaluation will serve to further increase costs in the UK.
It is unlikely that we will see a UK recovery in 2013. In fact there is a strong likelihood that the Bank of England will embark on further money printing in order to stimulate the weak economy. UK contractors and small businesses should brace themselves for rising costs and a triple dip recession.