International rating agency Moody’s has warned the UK economy will slow significantly this year, with growth prospects “materially weaker” if a trade deal allowing access to the EU market is not reached.
The agency stressed that Britain is at risk of a sovereign credit rating downgrade in the case of “no deal.” The potential lowering will reportedly increase the Treasury’s borrowing costs.
“The likelihood of an abrupt – and damaging – exit with no agreement and reversion to WTO trading rules has increased compared to our expectation directly after the referendum, with the government so far pursuing objectives that imply a ‘hard’ exit,” the agency said in a press release.
The country may lose its Aa1 rating if “core elements of the UK’s current access to the EU single market” are lost through quitting the bloc.
“It remains unclear whether the UK government can eventually deliver a reasonably good outcome for the UK,” Moody’s says.
Political uncertainty has grown worse after last month’s election returned a hung parliament.
“Political and fiscal risks have increased following the government’s loss of its parliamentary majority in early elections in June, and the government is under significant pressure to raise spending,” says Moody’s.
According to the agency, the current situation will make it harder for Chancellor Philip Hammond to protect the public purse, increasing the risk of a rating downgrade.
“Continuously higher budget deficits than expected and further delays in reversing the rising public debt trend would also be negative for the rating,” Moody’s added.
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“In Moody’s base case scenario though, the UK and the EU will manage to agree on a free trade arrangement as this remains in the interests of both sides,” said Kathrin Muehlbronner, the UK analyst for Moody’s.
Last year, the agency downgraded its outlook on the country from “stable” to “negative” following the Brexit vote.
Earlier, the Standard & Poor’s agency lowered its medium-term growth forecasts for Britain. The firm expected the country’s GDP growth to cool to 1.5 percent in 2017 from 1.8 percent last year.