S&P warns no deal Brexit would spark recession and downgrade

S&P has warned that a no deal Brexit could spark a long recession in the UK economy, resulting in a downgrade from the ratings agency.

The global rating agency said that it still expected the UK and EU to strike some form of deal. However, if recognised an “increasing risk that the UK will secede from the EU and, importantly, the EU single market, without any deal at the end of March.”

“This reflects the inability thus far of the UK and EU to reach agreement on the Northern Irish border issue, the critical outstanding component of the proposed Withdrawal Treaty,” S&P said.

The report added that failure to work out a deal would result in a 5.5% decline in Britain’s economy over three years relative to current expectations, and adds that most of the loss would “likely be permanent.”

“After that, the economy would return to growth, although the pace of growth would be moderate,” S&P said. “By 2021, economic output would still be 5.5% less than what would have been achieved in a scenario with an orderly exit and transition period for the UK.”

The ratings agency also warned in a no deal scenario, unemployment could surge from 4% to 7%, with house prices falling by 10% over the next two years.

S&P added that if the UK crashes out of the bloc without a deal, its double-A rating was “likely” to be reduced. The country was stripped of its pristine triple-A rating after the 2016 Brexit vote.

S&P is also worried that in a no-deal scenario, tariffs would be placed on British exports, border checks would be reinstalled, and restrictions could hit travelers and workers.

Though the same would apply for European products crossing the English Channel, most economists agree that Britain would face a bigger hit proportionately.

“Contingency plans are unlikely to insulate companies fully from market volatility, legal and regulatory uncertainty, border delays, rising input costs and tariffs, and weakening competitiveness and operating performance in many sectors,” the report said.

Pedro Gonçalves
Pedro Gonçalves is Financial Correspondent at International Investment.

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