Moody's Investor Services warned that it may cut the UK's Aaa debt rating if the country falls into triple-dip recession next year, just hours after the Bank of England's lowered growth forecasts for Europe's second-largest economcy.
In its annual credit report on the country, the agency said the rating and the negative outlook will undergo a review in the first few months of 2013 following the UK Treasury's autumn Budget Statement to Parliament.
"The UK's Aaa government debt rating, and current negative outlook, continue to be underpinned by significant structural strengths, but cautions that the government's efforts to achieve fiscal consolidation and reduce debt over the next few years are being hampered by weaker economic prospects as well as by the risks posed by the ongoing euro area sovereign debt crisis," Moody's said.
The rating is backed by factors including the country's large, diversified and highly competitive economy, a flexible labour force and structural reforms, according to the rating agency.
Moody's said that the UK has a favourable debt structure and a wide range of monetary and fiscal policy tools along with its commitment to fiscal consolidation.
On the other hand, the country's credit rating is being hurt by its growth shortfalls, which reduced its ability to "absorb further fiscal or economic shocks."
The weaker macroeconomic environment hampering revenue growth trigged Moody's decision to change the rating outlook to negative. The issue continues to be critical for the sovereign rating in the future, Moody's said.
The agency said it is keen to know how the country balances the need for fiscal consolidation against the need for economic stimulus in its autumn statement to be released in December.
In its rating assessment, Moody's will take into account the country's growth outlook and the ongoing crisis in the eurozone, which can affect trade, the financial sector as well as consumer and investor confidence in the UK.
Claiming the economic boost in line with the Olympics an exception, the Bank of England previously halved the country's growth forecast for 2013 to 1 percent.