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Moody Blues for Osborne

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As much as the UK is grey and cold outside, we all know that spring is on its way and with it comes the opportunity to make progress with things that may have taken a backseat in the winter months. People talk about 'blowing out the cobwebs' and 'spring cleaning' at this time of year, and it seems that the same may apply to the economy as well.

Moody's downgrade of the UK economy last week was not a surprise for anyone who takes even a passing interest in the world of finance. Some had predicted that the loss of Britain's prized AAA rating would spark a run on the pound and UK debt, however the markets have not even broken into a brisk walk. Instead, the predicted 'humiliation' of sterling and UK debt assets has, as of yet, failed to materialise. Hopefully this will allow for some clearer thinking from Westminster.

The influence of these ratings agencies is often overplayed. Tying the perception of your economic performance to someone else's opinion is, and always has been, a recipe for disappointment. The question is, with the single-mindedness of keeping our rating at AAA now out of the way, what else is there to fill the policy gap? The sacred calf has been slain and Osborne has been given a one-time opportunity to change the tack of UK fiscal policy. In next month's Budget he has the perfect setting.

This is not to say that we won't come in for another round of downgrades by other ratings agencies in the coming months. Ratings agencies typically like to base their decisions around large trigger events - the major surprise of the Moody's downgrade was the timing - and with the initial reading of UK GDP for Q4 out of the way the market was looking at March's Budget as the next signpost.
S&P seem to be waiting until then, with Fitch saying as much in recent weeks. They will be looking to see how Osborne balances the expectations of the markets, politicians and the voters; it's difficult to put those in order from highest to lowest as it stands at the moment.

Moody's and Osborne have warned that deviation from the deficit reduction plan may prompt 'further ratings action' and so, unfortunately, the chance of a real change of course remains slim. It's an adjustment which is needed - the UK has been asleep at the wheel of growth for too long now.