Last night leading credit ratings agency Moody’s downgraded the UK economy from AAA to Aa1.
The reasons could not have been more clear; the coalition’s ‘significant policy commitment to austerity‘ was a ‘drag‘ on the economy.
Moody’s managing director Bart Oosterveld added that:
“There is a risk, given the pace of deficit and debt reduction, that the government may not be able to reverse the debt-to-GDP trajectory before the next economic downturn happens.”
For the last 3 years the UK has been very lucky, with the financial markets, the Euro crisis and the US political instability all boosting the perception that the UK is the least ‘ugly’ country in Europe for investors.
Being a large economy with its own independent bank made the UK a safe haven compared to the Eurozone in particular. The great arrogance was this government’s belief that it was the government’s austerity policy that was producing this honeymoon period with the markets.
It wasn’t, and now we will see how wrong they were.
Almost a year ago, writing here, I contrasted the actions of the US government who, through stimulus and investment, had produced “a tangible bridge back from the abyss allowing the private sector to motor back to strong growth”.
At the same time the UK had its “bridge kicked away by an ideologically-driven assault on government by the Conservative-led coalition just when it was needed most”.
The last three years were an opportunity for the UK government to step up to the plate and help businesses. It chose not to do that.
Let us compare GDP growth from 2010 to 2012 in the UK with that of other countries. Sweden, another modern economy with a similar relationship to Europe? 11.6% growth; The embattled politically-
The mismanagement of the UK economy, driven by an ahistorical economic philosophy – try to name another time in modern history when an austerity-driven government has brought an economy out of recession – will in time ensure that this administration is seen as the most economically incompetent UK government in modern times.
For now, we can only note the missed opportunity of the past three years.
So what will the future bring?
Usually there would be a run on government bonds, but with the flood of cash to bonds from Quantitative Easing (QE), this is unlikely to happen. The currency markets are where the action is and the pound will continue, as it already has, to fall.
The real effect is that the UK’s hands are now economically tied.
Was it by chance that three days ago the Bank of England minutes showed that Sir Melvyn King was out-voted on expanding QE further: was his vote a warning? The Bank of England will not dare now push back on QE.
The great fear is inflation accompanying flat growth and again we have become powerless: would the Bank of England be brave enough to raise interest rates to combat inflation when the economy is flat-lining?
This is perhaps the saddest fact of all; we had 3 years to repair the house, fix the walls and stop the roof leaking. Instead we were busy ripping up the floorboards and tearing the plaster away.
What this government’s economic vandalism has left us with is a house that is unprotected against any future economic storm.