UK will be downgraded and risks triple dip recession, warns senior economist
The UK could be pushed into a “triple dip” recession by spiralling inflation and interest rates after a period of growth, predicted Europe Economics director Andrew Lilico.
Speaking this morning at an Autumn Statement briefing organised by the Institute for Economic Affairs and the Taxpayers’ Alliance, Lilico warned:
“There’ll be a triple dip, the triple dip will follow inflation.
“What will happen is we’ll have a phase of recovery. In this economy we have found that whenever it wasn’t actually contracting, inflation goes to 5% and rising. When we get some 3% growth, inflation could go higher than that. They’ll be forced to whack up interest rates.
“That will both induce another recession and screw the banks because those banks, as the interest rates go up, will find that the gilts they’ve had imposed on them would impose massive losses on them.”
Lilico also said there was a “good chance” that the UK could lose its AAA credit rating and be downgraded by rating agencies. He warned that it would be a “political humiliation” for George Osborne, because the chancellor said the credit rating served as a “vote of confidence” in his economic management.
“I think the idea that we can let that go without consequence is implausible. If we end up downgraded, people will ask - what was it all for?”
Speaking alongside him, economist Ruth Lea said that the UK “will be downgraded,” but made clear it wouldn’t be “the end of the world”. She pointed to America as an example of a country that “has been downgraded and things went on much as normal.”
“I’d be amazed if we kept our triple AAA rating,” she added.
Lilico went on to warn that the downgrade could send the UK onto a downward spiral with further downgrades in the pipeline, saying:
“There is a material risk that the downgrade leads to some rise of a further downgrade.”
However, Taxpayers’ Alliance chief executive Matthew Sinclair expressed doubt on the idea, saying a triple-dip recession would be “very surprising”. He predicted that the economy would continue to enjoy a “very stable recovery”.
Finally, Tory MP and Treasury select committee member Andrea Leadsom played down the implications of a downgrade as “the States, Japan and France have all been downgraded and that hasn’t hit their cost of borrowing.”
However, she warned that the unwinding of the quantitative easing monetary programme could be a “real potential disaster” due to the “very great” risk of an over-reaction in the markets from “dumping a load of gilts”.