Standard & Poor's has maintained its AAA long-term credit rating for the UK and said the outlook remains stable, while warning GDP will be lower than forecast for the next three years.
The ratings agency, which has cut credit ratings of peers including the US, said the UK's economic and fiscal flexibility had served it well, with international investors also continuing to support the economy by buying up gilts.
S&P also affirmed the UK's short-term credit rating of A-1+, adding the UK's deep capital markets and wealthy and diversified economy were supportive of the AAA rating.
S&P's comments came as UK chancellor George Osborne said today at the Conservative Party Conference he would "ride out the storm" engulfing markets and stick to his austerity plan, rejecting calls for temporary tax cuts and other fiscal stimulus measures.
The statement from S&P confirmed the UK government's programme of fiscal austerity was central to the retention of the AAA rating and stable outlook, but also warned growth will be lower than government forecasts estimate.
S&P said the government's assumption that the private sector would step in to replace lower public sector growth may prove optimistic given weakening external demand, low labour productivity, a shortage of skilled workers and insufficient investment in infrastructure and innovation.
"As a result, we expect the UK will post relatively modest growth rates of around 1.8% on average in 2011-2014, lower than the 2.5% forecast by the Office for Budget Responsibility," S&P said.
"We also think that economic rebalancing may lead to lower growth in tax revenues than the OBR currently projects, which could put pressure on public finances."
The lower growth forecasts mean S&P is forecasting a government deficit of 3.3% of GDP in 2014, compared with the government's 2.6% deficit forecast for fiscal year 2014-2015.
S&P warned the UK's rating could come under downward pressure if the government's considered easing its austerity measures in response to weakening growth prospects.
"Such downward rating pressure could stem from a reappraisal of our fiscal deficit forecasts or of our view of the government's ability to implement its current fiscal strategy," S&P said.
S&P has already slashed ratings for other developed economies,most notably in August when it cut the US' credit rating to AA+. It revised the UK's outlook from negative to stable in October 2010, citing the government's commitment to closing the fiscal gap.
Cautious, Balanced & Dynamic Growth
Cowardly, boring or sensible
Latest news and analysis
‘Most significant’ upgrade since launch
Changes happening over coming months