AAA credit rating reportedly under threat on debt worries Britain's first-quarter economy shrank at the fastest pace since 1979, adding to worries about a sharp increase in government debt. British government bonds, or gilts, have fallen sharply this week, pressured in part by worries that government debt could surge in coming years as a result of the downturn. At least one credit-rating company has warned that Britain could eventually lose its top rating unless the government moves to reduce debt more quickly than is currently planned. First-quarter gross domestic product contracted 1.9% from fourth-quarter 2008, the Office for National Statistics reported Friday, in its first estimate of the economy's quarterly performance. That's the steepest fall since the third quarter of 1979. Compared with the first quarter of 2008, GDP dropped 4.1%. That's the biggest annual drop since 1980. Economists were looking for a quarterly contraction of 1.4% and a year-on-year fall of 3.7%, according to a survey conducted last week by Dow Jones Newswires. The economy saw a quarterly contraction of 1.6% and an annual fall of 2% in the final quarter of 2008. "Our forecast for a near 4.5% contraction in the GDP this year is at the most pessimistic end of the consensus range -- a percentage point weaker than the [government] and the consensus. Following this reading, there is a risk that we are not pessimistic enough," said Alan Clarke, economist at BNP Paribas. The first-quarter plunge was driven by a 1.2% quarterly contraction in the services sector, which dominates the U.K. economy. Production industries and construction also saw declines, the ONS said. British consumers increased spending in March despite the deepening recession, according to the ONS. The agency said seasonally adjusted retail sales rose 0.3% in March after falling by a downwardly revised 2% in February. Compared with March 2008, sales were up 1.5% compared with a 0.4% annual increase in February. The British pound slipped to a low for the day versus the U.S. dollar to trade at $1.4628. The broadly stronger euro was up 1.4% to trade at 90.54 pence. The FTSE 100 index was unfazed, gaining 1.3%. The government's annual budget, delivered by Chancellor of the Exchequer Alistair Darling on Wednesday, said government borrowing would surge to 175 million pounds, or 12.4% of GDP, in the current year from a record 90 billion pounds in the just-completed fiscal year. See full story. Darling announced plans to boost taxes on the wealthy and cut spending in coming years, saying the deficit would be halved within five years. But economists said the goal relies on overly optimistic growth projections for 2010 and beyond. And the first-quarter GDP data could mean that Darling's above-consensus forecast for a 3.5% contraction in the British economy in 2009 will also prove too rosy, economists said. "A contraction of only 3.5% this year as outlined in the budget on Wednesday seems now to be wishful thinking from the chancellor," said Benjamin Williamson, an economist at the Center for Economic and Business Research. A 4% contraction is more likely, he said, and CEBR forecasts a 4.5% drop, which would make for the steepest yearly drop since a 5.1% contraction in 1931. The price of the 10-year gilt fell an additional 30 basis points, or 0.3 percentage point, on Friday to around 107.86. The yield, which moves inversely to price, rose by around 3 basis points to 3.54%. The Daily Telegraph said Moody's and Standard & Poor's are reviewing the U.K. rating in the wake of the budget. The credit raters have already downgraded Spain, Ireland, Greece and Portugal. A spokeswoman for S&P said the agency is looking at the details of the budget and had no comment at this stage. A credit opinion Moody's issued on Thursday said that Britain's credit rating is stable, but that the government needs to bring the deficit down faster than currently planned. Public finances are deteriorating at a "considerable" pace, but a "comparatively low level of debt initially means that the U.K. is so far not an outlier" among countries that hold Moody's highest rating, Aaa. The rating can be maintained if the U.K. economic model isn't "lastingly dented," Moody's said, and if after next year's general election the government proves willing to take measures to bring its structural deficit into balance faster than currently planned. If the government chooses instead "to operate with a structurally higher level of indebtedness, this would likely have ratings implications over time," the report said.

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