No-deal Brexit 'material and growing possibility', warns Fitch

Rating agency Fitch warned of growing risk of a general election and a second Brexit referendum, due to deep divisions within the government that make a no-deal Brexit "a material and growing possibility".

"An intensification of political divisions within the UK and slow progress in negotiations with the EU means there is such a wide range of potential Brexit outcomes that no individual scenario has a high probability," Fitch said in a note to clients on Thursday.

“We no longer believe it is appropriate to identify a specific base case.”

Fitch's previous assumption that Britain would leave the EU in March next year with a transition deal in place until December 2020 is now felt to look more uncertain, making a smooth transition less likely and “an acrimonious and disruptive no-deal Brexit is a material and growing possibility”.

Due to “the depth of division" within the Tory Party and parliament, Fitch argued that “any deal is likely to provoke brinkmanship and may not gain parliamentary approval", which analysts said "could trigger a general election and greater talk of a second referendum".

Hardline Tory Brexiteers are due to publish a white paper next month acting as a blueprint for a no-deal Brexit, rejecting Prime Minister Theresa May's Chequers proposal that was introduced last month.

It is understood that the European Research Group supports the UK leaving the EU on World Trade Organisation terms and allowing for a possible Canadian-style free trade agreement with the EU where there would be no tariffs on trade between the UK and the EU, but Britain would not be part of the single market or customs union.

A leaked Treasury forecast found that a no-deal Brexit of the kind championed by the ERG would likely have a highly damaging effect on the economy, reducing growth by 8% over the next 15 years.