Hard Brexit could bring recession, warns Moody's
The UK’s withdrawal from the European Union without a deal could damage the economy and be credit negative for a range sectors and debt issuers in the UK and Europe, possibly leading to another recession, credit agency Moody’s warned.
"We still think the UK and the EU will eventually reach an agreement to preserve many - but not all - of their current trading arrangements, particularly around trade in goods," said Colin Ellis, Moody's Chief Credit Officer EMEA and co-author of the report. "However, we believe the prospect of the UK leaving the EU without any agreement has risen materially.
"The precise impact of a 'no deal' outcome is impossible to define because both the UK and the EU would likely take swift steps to limit short-term disruption. But it would clearly pose more significant credit challenges than a negotiated exit,” he added.
The impact of a no-deal scenario would vary across countries, sectors and issuers, the UK would see its economic, fiscal and institutional strength damaged which would cause the pound to plunge. This would lead to a higher inflation and lower wages for workers.
For the EU, countries such as Ireland, the Netherlands, Cyprus and Malta could experience some challenges regarding trade, especially in Ireland where a hard border could potentially harm the Good Friday Agreement.
Regarding business in the UK, tariffs, a weak pound and regulatory changes could have a negative effect especially on sectors such as airlines, automotive, aerospace and chemicals. The UK banking sector would also weaken due to lower asset quality and weaker profits.
Institutions such as schools, universities and even Transport for London could be under some pressure as staff recruitment and income could be affected due to reduced immigration, a weaker economy and lower employment.
The report comes at a time when concerns of a no-deal scenario are on the rise as Prime Minister Theresa May is having trouble convincing Tory hardliners and the EU that her view of Brexit, the so-called Chequers plan is the way forward. The EU have estimated that a deal should be in place by November since it would give both sides enough time to prepare before the exit in early 2019.
Moody's warning comes after fellow rating agency Fitch said last month that a no-deal Brexit was "a material and growing possibility" due to the growing risk of a general election and a second Brexit referendum.
"An intensification of political divisions within the UK and slow progress in negotiations with the EU means there is such a wide range of potential Brexit outcomes that no individual scenario has a high probability," Fitch said in a note to clients.
However, on Thursday it was reported by Bloomberg that the EU is hoping the UK will finally agree to an Irish “backstop” proposal before November to close a deal by that date.
With the Irish issue one of the main hurdles on the road to a Brexit deal, the EU are starting to redraft the language on the “backstop” in an attempt to make it more acceptable for the UK.