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No-deal Brexit would bring recession, unemployment and higher prices - Moody's

File photo dated 31/03/17 of the Union flag and the EU flag flying from the same mast above the Summerhall building in Edinburgh. EU citizens living in the UK are in Brussels to urge members of the European Parliament and Commission to ensure their rights are guaranteed after Brexit. PRESS ASSOCIATION Photo. Issue date: Thursday May 11, 2017. Anne-Laure Donskoy will tell MEPs that EU citizens' rights "to work, to marry, to have access to health services and education, to build a business" are "at risk" and should be "guaranteed and preserved not just for the short or medium term but permanently". See PA story POLITICS Brexit. Photo credit should read: Jane Barlow/PA Wire

By Ravender Sembhy, Press Association City Editor

Britain would fall into recession, the pound would collapse and shop prices would rocket in the event of a no-deal Brexit, credit ratings agency Moody's has warned.

In a grim reminder of what is at stake as the Conservative Government scrambles to avert a chaotic EU exit, Moody's said the probability of a no-deal Brexit has "risen materially".

"The immediate impact of a no-deal Brexit would likely be seen first in a sharp fall in the value of the British pound, as was also evident after the 2016 UK-wide referendum on whether to remain in or leave the EU.

"The fall in the exchange rate would lead to temporarily higher inflation and hence a further squeeze on real wages over the following two to three years, which in turn would weigh on consumer spending and depress growth."

The report added that unemployment would rise, the Treasury would be knocked by lower tax revenue and the UK could "fall into recession very quickly".

The automotive, airline, aerospace and chemicals sectors would be most severely affected, Moody's said, as they account for the largest trade flows in goods with the EU.

The impact on the retail sector would be "substantial" as higher World Trade Organisation tariffs take their toll.

"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," said Colin Ellis, Moody's chief credit officer and co-author of the report.

"However, we believe the prospect of the UK leaving the EU without any agreement has risen materially."

The warning comes as the Government publishes its next set of technical papers on what could happen if Britain leaves the EU without an exit agreement.