Ratings firm says recession could cause GDP to contract by 1.2% in 2019, 1.5% in 2020
Ratings agency Standard & Poor’s warned Tuesday that a so-called hard Brexit could lead the U.K. into a moderate recession and weaken its long-term growth potential, which could then hurt its credit rating.
Although S&P’s base-case is that the U.K. and the European Union will reach a Brexit deal that will be succeeded by a transition phase through 2020 and a free-trade agreement, “we believe the risk of a no-deal has increase sufficiently to become a relevant rating consideration,” said credit analyst Paul Watters, in a news release.
This was particularly due to the impasse on the Irish border that London and Brussels haven’t been able to come to an agreement on, said Watters.
Last week, U.K. Prime Minister Theresa May told members of Parliament that the Brexit deal was 95% done. May has come under pressure continuously over her way of handling the negotiations, particularly from members of her own party who have taken a hard line on Brexit, and investors have been fretting about whether she could face a vote of no-confidence.
European Central Bank head Mario Draghi said during a news conference last week he was confident a sensible Brexit deal could be achieved. Still, a hard Brexit could lead to “financial uneasiness,” he said.
A recession caused by a hard Brexit, where the U.K. leaves the union without a deal in place, could last a year or longer, with annual GDP contracting by 1.2% in 2019 and 1.5% in 2020, before returning to growth in the following year. Compared with an orderly Brexit, this scenario would see 5.5% less GDP growth in the U.K. by 2021, according to the ratings firm.
Meanwhile, unemployment would climb from its current all-time low of 4% to more than 7% by 2020, while house prices drop by 10% over two years. Household incomes would also slip by £2,700 each year between 2019 and 2021, and inflation would pick up to 4.7% in mid-2019.
All this could impact the U.K.’s economic, fiscal and credit ratings, not to mention the operations of British corporations and their credit ratings, according to S&P.
“U.K. banks will likely be the most vulnerable banks in a no-deal Brexit, but even severe macroeconomic weakness leading to rising corporate insolvencies and weaker collateral values would only play through to bank asset quality and undermine bank earnings and capital over time,” the S&P report read.
The uncertainty around Brexit has induced much volatility for the British poundGBPUSD, -0.2047% which has dropped 5.9% so far this year, according to FactSet.
Image source: www.marketwatch.com