'No-deal' Brexit could trigger recession, ratings agency S&P warns

Analysis from Standard & Poor’s also found that leaving the EU without a deal would prompt a sharp fall in house prices and see household incomes fall by an average of £2,700 a year over two years.

S&P still expects a deal to be agreed but said that the risk that it would not had “increased sufficiently” to warn investors of what this might mean.

The analysis comes as the pound hovers around its lowest level against the US dollar for more than two months, at $1.27, amid anxiety over Brexit.

S&P’s analysis sees a recession lasting four to five quarters should there be no deal before the exit date on 29 March.

It sees the economy shrinking 1.2% in 2019 and 1.5% in 2020, and returning to only moderate growth the following year so that by 2021 economic output would still be 5.5% lower than in the event of an “orderly exit and transition period”.

The scenario would see unemployment rise from the current level of 4% to more than 7%, a rate last seen in the wake of the financial crisis.

House prices would fall by 10% over two years while, alongside the sharp fall in household income, inflation would turn higher and peak at 4.7% in mid-2019.

The situation would be likely to result in ratings downgrades for UK government debt and also leave UK banks vulnerable, according to the analysis published on Tuesday.

S&P global ratings credit analyst Paul Watters said: “Our base case scenario is that the UK and the EU will agree and ratify a Brexit deal, leading to a transition phase lasting through 2020, followed by a free-trade agreement.

“But we believe the risk of a no-deal has increased sufficiently to become a relevant ratings consideration.

“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.”

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