S&P Says It's Difficult to Fathom How U.K. Can Avoid Hard Brexit

  • Possibility of quitting single market a risk to outlook
  • Reconciling immigration, trade remains sticking point in talks

The U.K. is probably headed for a hard Brexit and, alongside the “schisms” in British society that the referendum has revealed, the economic fallout remains a risk, according to S&P Global Ratings.

A key sticking point ahead of formal divorce talks between British and European leaders is whether the U.K. can retain access to the single market -- which allows for the free movement of people, capital, goods and services -- while restricting immigration from the bloc. Politicians on the continent have warned that the ability to trade freely with the market of 500 million consumers goes hand-in-hand with the free movement of people.

“It is hard to fathom how a rather hard Brexit can be avoided unless both sides become much more flexible than they appear,” Moritz Kraemer, S&P’s global chief ratings officer, said in a statement Friday. “Nothing today suggests that a common quest for compromise will overcome the gulf that now looks as wide as the English Channel.”

The British government will start negotiations for its exit from the European Union once Prime Minister Theresa May activates Article 50 of the bloc’s Lisbon Treaty, triggering two years of haggling over the two sides’ future relationship.

Most of the economic impact of a withdrawal from the single market would hit the U.K. itself, with the effect on the world economy likely to be more limited since Britain accounts for a “small and shrinking” share of global output, S&P said.

The agency downgraded its rating of the U.K. by two notches after the June 23 referendum, citing the risk of a less predictable, stable, and effective policy framework. It remains on negative outlook.

Before it's here, it's on the Bloomberg Terminal.