EU referendum: Fitch warns that protracted post-Brexit negotiations could trigger recession
The stakes of any post-Brexit negotiations were laid bare today in a new report from ratings agency Fitch, which assesses how the UK economy will perform if it were to secure different terms of exit after voting to leave the EU.
In its worst scenario – in which Fitch predicts at least two years of political wrangling along with sustained market turbulence – the UK economy dips into a technical recession, sterling loses 30 per cent of its value to fall below parity with the euro and inflation spikes in a "stagflation"-type episode.
If a vote to leave results in Scotland holding a second referendum and voting for independence, this would further exacerbate the UK's balance of payments deficit and heap even more pressure onto the UK's gold-standard triple-A credit rating – which could have already been cut following the vote to leave.
Fitch's Brexit scenarios
|
Vote |
Details |
Effects |
|
Remain |
UK stays in EU and reform package implemented |
UK/EU tensions ease Net EU migration remains high stoking discontent Funding costs for banks ease, supporting extra lending Retailers benefit from stronger sterling and boost to consumer confidence |
|
Leave (Favourable) |
Rapid renegotiation with some political concessions and retention of access to single market |
15 per cent depreciation in sterling before stabilisation Weaker growth EU net migration falls No operational changes needed for UK-focused banks, but unknown effect on London's financial services centre Exporters to benefit from weaker sterling Corporates with non-sterling debt such as airlines would struggle Lower immigration will affect buy to let sector and, ultimately, house prices |
|
Leave (Unfavourable) |
Protracted negotiations and failure to strike favourable trade deal |
30 per cent depreciation in sterling Technical recession Net EU migration falls to near zero Surge in inflation and debt leading to higher interest rates House prices fall (particularly in London) Government borrowing costs spike Erosion of London's financial services centre |
| Leave and Scotland votes for independence | Either a favourable or unfavourable exit followed by a Scottish vote for independence in a second referendum |
Any of the above depending on terms agreed Hit to UK's balance of payments Credit rating to come under pressure given uncertainty of debt sharing and currency arrangements |
However, in its best case scenario, the UK strikes some kind of trade deal with the rest of the EU soon after voting to leave and short-term market volatility is limited.
Fitch does not state explicitly which potential path this scenario assumes the UK follows, though it bears some resemblance to the EEA or Norweigian model campaigners have discussed. In this, the UK retains access to the single market and strikes deals on trade, budget contributions, regulatory agreements and rules on free movement.
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If this occurs, sterling would fall by 15 per cent immediately after the vote to leave, Fitch said, before stabilising at this lower level which would provide some support to UK exporters. Migration from the EU would fall, which would lead to lower growth rates. Interest rates would also need to be higher than they otherwise would be, to counter the rise in prices caused by more expensive imports. Property prices, too, would drop.
In a separate report, also released today, Fitch said Brexit could also trigger a wave of populism across the continent.
Leave campaigners have hit back vociferously against establishment figures warning of economic trouble after a vote to leave. Mark Carney, Christine Lagarde and George Osborne faced the ire of former chancellor Lord Lamont and Brexit campaigner and cabinet minister Priti Patel last week after suggesting the UK could fall into recession following Brexit.