Lorries embark a DFDS AS ferry at the Port of Dover Ltd., U.K. in Dover, on Tuesday, Aug. 1, 2017. Customs checks at the border after the U.K. leaves the European Union could cost 1 billion pounds ($1.3 billion) a year and cause delays for goods being shipped in both directions, according to a report by Oxera, an economic consultancy. Photographer: Chris Ratcliffe/Bloomberg
Lorries embark on a ferry at Dover, a major trading port for EU-bound trade © Bloomberg

S&P Global Ratings said on Tuesday that the chances of a no-deal Brexit had increased and warned that such an outcome would spark a long recession and a likely reduction in Britain’s credit rating.

The agency said its baseline scenario was still that the UK and EU would strike a pact in which the transition period runs through 2020, followed by a free trade agreement.

However, the risk of the UK crashing out of the bloc without a deal “has increased sufficiently to become a relevant rating consideration”, S&P said.

“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.

Sterling fell 0.7 per cent to $1.2702, a new low for the day, on the S&P report. It has tumbled 11.4 per cent from its April peak.

The S&P report comes just a day after Philip Hammond, UK chancellor, laid out an optimistic Budget but said he had provided an additional £500m for government departments in order to prepare for a potential no-deal Brexit.

A no-deal Brexit would spark a “moderate recession lasting four to five quarters”, S&P warned. It forecast that the economy would contract 1.2 per cent in 2019 and 1.5 per cent in 2020 in this case.

“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 per cent less than what would have been achieved in a scenario with an orderly exit and transition period for the UK.”

The labour market would also suffer a blow, with the jobless rate rising by 2020 from historic lows of 4 per cent to 7 per cent, a level not seen since the wake of the financial crisis. House prices, meanwhile, would fall 10 per cent over two years, while inflation would accelerate to a peak of 4.7 per cent by mid-2019.

Few forecasters have tried to predict the outcome of a disorderly, no-deal Brexit, although Mark Carney, Bank of England governor, also suggested a recession would be likely. The Office for Budget Responsibility said that a parallel might be found in the three-day week of the early 1970s when energy was rationed.

Most estimates of no deal have instead focused on the long-run impact, where estimates range from a hit of roughly 2 per cent of national income to around 10 per cent. Only the pro-Brexit lobby Economists for Brexit have estimated a gain in the long run from leaving the EU without a deal.

S&P said that, in the case of a no-deal, its “economic, fiscal and debt, and external assessments would come under pressure”. It added that the UK’s double-A rating was “likely” to be reduced. The country was stripped of its pristine triple-A rating after the 2016 Brexit vote.

Brexit negotiations have become deadlocked, with questions over how to deal with the border between Northern Ireland and the Irish Republic representing a tough sticking point to overcome.

Theresa May, UK prime minister, also faces a significant hurdle in selling any eventual agreement to parliament — with factions in her own Conservative party split on how to proceed.

S&P’s forecast will raise pressure on backbench Tory MPs to support any deal that Mrs May is able to strike with Brussels over the coming weeks and will be welcomed in the Treasury for adding to the pressure already on parliamentarians to support the government rather than risk being blamed for sending the country into recession.

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