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UK Growth To Remain Solid, High Debt Burden Key Weakness: Moody's

British economic growth is set to sustain its solid growth momentum, but the country's high debt burden is likely to remain a weakness, which is unlikely to drop before 2017, Moody's Investors Service said in a report on Monday.

The rating agency forecast real GDP to increase 2.7 percent and 2.4 percent this year and next, respectively.

"However, the UK's economic growth pattern remains relatively unbalanced and mainly driven by domestic demand and the services sector, while exports and manufacturing remain subdued", Kathrin Muehlbronner, a Senior Credit Officer at Moody's, said.

If the weak productivity performance of the past several years persists, it could pose longer-term growth challenges for the UK economy. While welcoming the several measures announced by the government to boost productivity, Moody's said none of these reforms will likely bring quick results.

The government's track record and continuing strong commitment to reduce the elevated budget deficit as credit positive, the agency said. However, achieving the spending cuts targeted by the government might be difficult to achieve in full, it said. Hence, Moody's expects a more moderate reduction in the budget deficit, to just above 1 percent of GDP by the end of this parliament.

This pace of fiscal consolidation would be sufficient to engineer a gradual reduction in the public debt ratio from 2017 onwards and the UK's government debt ratio -- forecast to peak at a level of 91.5% o f GDP in 2016 -- is high by global but less so by European standards, Moody's said.

The agency listed two two idiosyncratic risks which could affect the UK's sovereign rating. Firstly, the referendum on EU membership, which may take place even earlier than expected, in the course of next year, it said.

"While the outcome of the referendum remains uncertain, Moody's believes that a withdrawal from the EU would have negative implications for the UK's growth prospects and -- in the absence of an alternative trade arrangement with the EU that at least partly replicates the current access to the EU's single market -- would likely put pressure on the UK's sovereign rating," the report said.

The second risk was the accelerated pace of decentralisation of fiscal powers to Scotland and other regions and cities, which might be more comprehensive than expected earlier. The agency believes that the government will likely manage to maintain a reasonably strong level of control and oversight and thus ensure that the planned devolution will not materially impact the UK's overall fiscal strength, the extent of any risk from a move towards greater federalism to the UK government's own balance sheet will only become apparent over time.

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