Moody’s warns of UK downgrade if Brexit deal weakens growth

LONDON – Britain was warned Wednesday that it will have its credit rating cut if the country fails to get a good-enough deal on access to the European single market during its upcoming negotiations to leave the European Union.

More than four months after Britain voted to leave the EU, the terms of Brexit remain to be ironed out. Prime Minister Theresa May has said she will invoke Article 50 of the EU Treaty by the end of March. That will launch two years of talks on Britain’s exit from the 28-country bloc.

In a wide-ranging report on the potential impact of Brexit on Britain’s economy, credit ratings agency Moody’s said it would cut its Aa1 rating if it concludes that the loss of access to the single market “would materially weaken” medium-term growth.

“The key will be how far the U.K. is able to replicate its current single market access in a new trade deal,” said Kathrin Muehlbronner, a senior vice-president at Moody’s. “The impact of ongoing uncertainty on U.K. investment, and the terms of any transitional agreement reached once the U.K. leaves the EU, will also influence growth.”

The European single market has been one of the cornerstones of British economic growth over the past few decades, allowing firms to trade freely to a customer base of more than 500 million. In return for that level of access, countries have had to allow free movement of people — and that’s one of the major reasons why 52 per cent of the British people voted to leave the EU in the June 23 referendum.

So far, it’s unclear what May’s government is looking to achieve while the other 27 countries in the EU have insisted they won’t enter discussions with Britain until Article 50 has been triggered.

In a speech last month, May signalled that her government would prioritize controls on immigration over access to the European single market, an approach informally called a “hard Brexit” that many business leaders across a raft of sectors have voiced concerns over.

However, last week Nissan announced that it would produce the next version of its Qashqai SUV and add production of the next X-Trail model at its plant in Sunderland, northern England, following unspecified government commitments. That announcement, which will safeguard thousands of jobs, stoked speculation that the government will be looking for tariff-free access to the single market — so-called “soft Brexit.”

Moody’s Muehlbronner conceded that the agency doesn’t expect to have clarity on Britain’s objectives — or its chances of achieving them — until the negotiations get underway.

“But once negotiations start, we expect that the spirit in which they are handled by both sides will offer important insights into the likely outcome,” she said.

One thing is fairly clear, according to Moody’s.

“In our view, there is little likelihood that the U.K. will not exit the EU,” Muehlbronner said.