British households would face a renewed squeeze on living standards from a no-deal Brexit that could tip the country into recession, according to a report.
Issuing a stark warning for Britain that crashing out of the EU without a deal next year would have widespread ramifications, the credit ratings agency Moody’s said the risks to the British economy had “risen materially” in recent months.
Failure to agree a deal with Brussels – which has become increasingly likely as Theresa May faces the threat of rebellion from eurosceptic Conservative MPs – would lead to a sharp fall in the value of the pound, triggering higher inflation and a squeeze on real wages lasting for as long as three years, it warned.
Outlining widespread potential damage for the economy, similar to warnings made ahead of the Brexit vote, the ratings agency said the squeeze on household finances from a spike in inflation would have the knock-on effect of lowering consumer spending. This would depress economic growth, potentially tipping the country into recession.
Moody’s said a no-deal scenario would be “credit negative” for businesses in a wide range of industrial sectors, including car manufacturers, airlines, aerospace firms and the chemicals industry.
Large companies rely on strong credit ratings from agencies like Moody’s, Standard & Poor’s and Fitch, which assess the ability of nations and businesses to repay their debts. Higher credit scores from these organisations enable these groups to borrow money for less on the international financial markets, giving a reasonable indication to investors they are able to repay their debts.
The banking industry could also see its credit strength deteriorate, while Transport for London would face the threat of lower passenger numbers affecting income due to a fall in migration, lower employment and a weaker economy. Universities may also struggle to attract staff and students, Moody’s added.
The capital’s transport authority said earlier this year it was facing a £1bn deficit from a surprise fall in passenger numbers.
While there would be widespread negative consequences for Britain from crashing out without a deal, Moody’s said such a scenario would also affect other EU countries with close trading links to the UK. Those in close proximity such as Ireland and the Netherlands would be affected, as well as nations with historical ties to Britain such as Cyprus and Malta.
The ratings agency said it was not a foregone conclusion that Britain’s creditworthiness would be damaged by a no-deal Brexit, should the government take sufficient steps to cushion the blow from leaving without a deal.
Colin Ellis, Moody’s chief credit officer for Europe, the Middle East and Africa, said it would be impossible to fully assess the impact of no-deal Brexit, although he warned: “It would clearly pose more significant credit challenges than a negotiated exit.”