S&P warns: no-deal Brexit could mean UK recession

S&P’s scenario shows that property prices would drop and inflation would rise to more than 5 percent. The agency also said it might downgrade the UK’s credit rating, which would cause an increase in the Treasury’s borrowing costs.

The report says 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.

“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 S&P report comes just a day after Philip Hammond, UK chancellor, laid out an optimistic budget but said he had provided £2 billion (€2.2 billion )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.”

UK PM Theresa May has said that a Brexit deal with the EU is 95 percent done, but crucial area such as the Northern Ireland border remain unresolved. Negotiations are about to enter the final few weeks.