While the UK is hoping to avoid a no-deal Brexit as it prepares for the worst, there is fresh warning over the potential impact to industries including insurance.
Rating agency Moody’s has released a new report examining the possible damage to be had in the absence of an agreement with the European Union replacing the trading arrangements currently in place. Among the dreaded scenarios? Recession.
According to Moody’s, a no-deal divorce would be credit negative for a range of sectors and debt issuers not only locally but also in Europe. For the UK, in general, the rating agency believes it would damage the country’s economic, fiscal, and institutional strength.
“The immediate impact would likely be seen first in a sharp fall in the value of the British pound, leading to temporarily higher inflation and a squeeze on real wages over the two or three years following Brexit,” noted Moody’s. “This in turn would weigh on consumer spending and depress growth, with a risk of the UK entering recession.”
Due to factors like tariffs, the weaker currency, and regulatory changes, sectors such as automotive, airlines, aerospace, and chemicals would be severely affected. Needless to say, banks and insurers wouldn’t be spared.
In particular, insurance companies operating in the UK are likely to face pressure on revenues and operating profits. Moody’s said weaker economic growth may result in reduced demand for insurance products.
“We still think the UK and the EU will eventually reach an agreement to preserve many – but not all – of their current trading arrangements, particularly around trade in goods,” commented Colin Ellis, Moody’s chief credit officer EMEA (Europe, the Middle East, and Africa). “However, we believe the prospect of the UK leaving the EU without any agreement has risen materially.
“The precise impact of a ‘no deal’ outcome is impossible to define because both the UK and the EU would likely take swift steps to limit short-term disruption. But it would clearly pose more significant credit challenges than a negotiated exit.”
