Britain faces the prospect of an immediate and prolonged recession, spiking unemployment and inflation if it crashes out of the European Union in March with no deal on future relations, a leading credit ratings agency warned Tuesday.
In a wide-ranging report, Standard & Poor's said a "no-deal Brexit could push the UK economy into a moderate recession and lower the economy's long-term growth potential."
In 2019, for example, it predicts the British economy will shrink 1.2 per cent if no deal is agreed, against the growth of 1.3 per cent that it expects if a deal is reached.
The report says failure to work out a deal would result in a 5.5 per cent decline in Britain's economy over three years relative to current expectations and adds that most of the loss would "likely be permanent."
Though S&P said its base case remains that Britain and the EU will come to some sort of agreement over their future economic relationship, it said it sees an "increasing risk that the UK will secede from the EU and, importantly, the EU single market, without any deal at the end of March."
When Britain triggered the two-year timetable to leave the European Union in the wake of June 2016 referendum on Brexit, this October's summit of EU leaders was supposed to be the moment a deal would be reached to give parliaments time to pass it into law ahead of the March departure.
But the summit yielded little amid disagreements on how to make sure a physical border is not re-imposed between EU member Ireland and Northern Ireland, which is part of the United Kingdom.
S&P is clearly worried that in a no-deal scenario, tariffs would be placed on British exports, border checks would be reinstalled, and restrictions could hit travellers and workers.
Though the same would apply for European products crossing the English Channel, most economists agree that Britain would face a bigger hit proportionately.
"Contingency plans are unlikely to insulate companies fully from market volatility, legal and regulatory uncertainty, border delays, rising input costs and tariffs, and weakening competitiveness and operating performance in many sectors," the report said.
S&P also warned that crashing out of the EU could see unemployment in Britain spike sharply to 7.4 per cent by 2021 from the current four-decade low of 4 per cent and that inflation would more or less double to 4.7 per cent by the middle of next year.
House prices, it said, could drop by 10 per cent by 2020 and the average household would be 2,700 pounds (USD 3,200) worse off in the years 2019-2021.
S&P added that a no-deal Brexit would "likely" see Britain's credit rating "lowered." In his annual budget statement Monday, Treasury chief Philip Hammond conceded that a failure to reach a deal with the EU could lead to a nasty economic reaction.
He insisted, though, that he expects a deal to be signed. Even those pro-Brexit proponents who are more sanguine than Hammond about the prospect of no deal think the British economy will encounter at least short-term turbulence.
(With inputs from agencies.)