UK holds on to AAA rating while EU suffers downgrade

The UK economy received an early Christmas present on Friday. Ratings agency Standard & Poor's has maintained the UK's credit rating at AAA. S&P believes the UK will experience higher growth and rising productivity in the coming years.

Average annual real GDP growth is expected to reach more than two per cent between 2013 and 2016.

In further good news for the chancellor George Osborne's deficit reduction strategy, S&P expect government borrowing to decline by another one per cent of GDP for the fiscal year 2014-15 and to continue to do so for the next four years.

S&P said in a statement:

We now expect net general government debt to peak one year earlier (in 2015) and at a lower level (89 per cent of GDP) than previously assumed.

However, S&P retained its negative outlook for the UK:

The negative outlook reflects our view of at least a one-in-three possibility that we could downgrade the U.K. in the next year if our growth projections fail to materialize. Lower-than-expected growth could derail recent indications of an improvement in fiscal performance and reignite challenges to financial stability.

While the UK may be breathing a sigh of relief, the story is very different when it comes to the wider economy of the European Union.

S&P downgraded the EU's long-term credit rating from AAA to AA+ while maintaining a short term rating at A - 1 +.

S&P said on Friday:

The downgrade reflects our view of the overall weaker creditworthiness of the EU’s 28 member states.

We believe the financial profile of the EU has deteriorated and that cohesion among EU members has lessened.

EU budgetary negotiations have become more contentious, signaling what we consider to be rising risks to the support of the EU from some member states.

The downgrade will come as a blow to EU leaders who had been hoping that the stabilisation of the Eurozone crisis during the course of 2013 had gone someway to restoring the EU's economic credibility.

Ireland has now exited from its international bailout with Spain hoping to follow suit. In November Eurozone finance ministers agreed that Spain would exit its banking aid programme in January. without drawing more European funds.