- The U.K. government continues to benefit from its exceptional monetary flexibility and its strong and tested institutions, in our opinion.
- We believe that the government will implement its fiscal mandate and that it has the ability and willingness to respond rapidly to economic challenges.
- We are therefore affirming our 'AAA/A-1+' unsolicited sovereign credit ratings on the U.K.
- The outlook remains negative, reflecting our view of at least a one-in-three chance that we could lower the ratings if the U.K.'s economic and fiscal performances were to weaken beyond our current expectations.
Standard & Poor's Ratings Services today affirmed its 'AAA/A-1+' unsolicited sovereign credit ratings on the United Kingdom. The outlook on the long-term rating is negative.
We have also affirmed the 'AAA/A-1+' long- and short-term issuer credit ratings on the Bank of England (BoE) and the 'AAA/A-1+' ratings on the debt program of Network Rail Infrastructure Finance PLC. The outlook on the BoE remains negative.
The affirmation reflects our view that the U.K. government remains committed to implementing its fiscal program, and that it has the ability and willingness to respond rapidly to economic challenges. In addition, the ratings are supported by the U.K.'s wealthy and diverse economy, fiscal and monetary policy flexibility, and adaptable product and labor markets. We also view the U.K. as having deep capital markets with strong demand for long-dated government bonds (gilts) by both domestic and nonresident institutional investors.
We expect real GDP growth to average 1.6% per year in 2013-2016, following growth of 0.3% in 2012. We base our projections on the government's current fiscal consolidation plans, an assessment of various measures designed to support and shield the economy, and our assumption that the eurozone will return to growth in 2014. It also reflects our expectation that governance issues with specific institutions or changes in EU-wide bank or tax policy will not materially diminish London's position as the EU's preeminent financial center. Finally, our forecasts are predicated on the U.K. remaining a member of the EU, with its implications for economic growth and the external position, via the impact on trade in goods and services, and foreign investment. Therefore, our baseline assumption is that business investment will not be affected by uncertainty regarding the outcome of a possible referendum on EU membership.
In our opinion, the factors that have constrained economic growth in recent years will likely continue to do so. We continue to believe the government's efforts over the next few years to cut its fiscal deficit will likely drag on economic growth, although we note that the pace of consolidation is expected to ease in the short term. We expect continued deleveraging by banks and households will also restrain growth, while weak external demand will hurt U.K. export performance and slow the pace of economic rebalancing--the eurozone accounts for about half of the U.K.'s overall trade. With weak private-sector domestic demand, corporate investment is likely to recover only as the external environment improves.
The authorities have been taking measures to support and stimulate credit growth, and have been encouraging banks to build capital through measures other than by shrinking loan books, but we do not expect these steps to have a substantial impact on net lending. Nevertheless, we note that the BoE's highly accommodative policy stance should help to keep private-sector debt-servicing costs moderate, and the currency competitive.
We believe the general government deficit for calendar-year 2012 on the accruals-based European (ESA 95) accounting standard was flattered by the transfer of the Royal Mail pension fund onto the government's balance sheet. As this was a one-off, we expect a rise in the deficit in 2013, followed by steady fiscal consolidation such that the deficit should fall to approximately 4.2% of GDP in calendar 2016. Our projection is higher than the Office for Budgetary Responsibility's (OBR's) 3.5% of GDP forecast for fiscal year 2016/2017 on ESA 95 accounting. This is largely based on our view that economic growth will likely be lower than that forecast by the OBR, though we acknowledge that this projection is subject to considerable uncertainty. We anticipate the general government net debt burden will peak in 2016, at just over 95% of GDP, on ESA 95 accounting, before gradually declining. We currently expect that the coalition government's consensus on fiscal policy will hold and that the government will implement the measures specified in its fiscal consolidation program to achieve the targeted savings.
The negative outlook reflects our view of at least a one-in-three chance that we could lower the ratings during the next two years if the U.K.'s economic and fiscal performances were to weaken beyond our current expectations. This weaker growth scenario could see net general government debt approach 100% of GDP, by our calculations, from its estimated current level of 85%.
We could lower the ratings if we were to conclude that the pace and extent of fiscal consolidation has slowed beyond what we currently expect. This could stem from a reappraisal of our view of the government's willingness and ability to implement its ambitious fiscal strategy or from weaker economic growth than we currently expect. We note risks to growth from falling productivity and private sector deleveraging, as well as the possibility that our assumptions about investor confidence in U.K.-EU-eurozone relations do not hold.
We could revise the outlook on the long-term rating to stable if the economy were to recover more quickly and strongly than we currently anticipate, enabling net general government debt as a percentage of GDP to stabilize during 2014-2015.
