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Failed Brexit talks will spark three-year recession, leading insurer cautions

Securing a transitional deal for the UK at the conclusion of Brexit talks is vital (Mike Kemp/In Pictures via Getty Images)

Thousands of smaller UK companies could fold in the aftermath of failed Brexit talks, a leading insurer has warned.

Euler Hermes, a credit insurance firm which is part of the giant Allianz group, warned that without a smooth transition period, Britain was staring at a three-year recession.

It predicted that should Brexit secretary David Davis be forced to walk away without a solid free trade deal, an additional 3,300 businesses would fall into bankruptcy – representing a 15% year-on-year rise to 25,100 firms going insolvent.

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A transition deal where the UK will remain in the single market in exchange for continued EU contributions, maintenance of some of the regulations and no migration control until a final trade deal is concluded, is vital, said Euler Hermes.

Without such a deal, the UK would fall into recession in 2019 on World Trade Organisation, with GDP predicted to contract by 1.2% and lasting for at least three consecutive years.

“In the long term the UK will clearly be worse off if access to the single market is restricted,” said Ana Boata, European economist at Euler Hermes.

“Rising financing costs, divestment, a significant decline in exports and further falls in the value of sterling will increase the pressure on terms of payment, turnovers and profit margins of UK companies.”

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She added: “The new government must endeavour to settle on a transition deal as it will be next to impossible for the UK and EU to finalise and ratify a free trade agreement in the next two years at the same time as finalising the EU exit.

“By avoiding legal uncertainty and keeping trading arrangements with the EU unchanged, the UK economy would stay resilient for the duration. It allows more time for negotiations for a positive outcome for the next trade partnership. In our view, this will translate into tariffs on selective goods – 2% to 3% tariffs on average – and some add-ons on services.”

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The firm predicts that signing such an agreement with the EU by March 2019 will significantly soften the negative economic impact of exiting the EU. Insolvency levels could rise by just 3% (less than 1,000 additional companies bankrupted) after increasing by 5% and 6% in 2017 and 2018, respectively.

Failure to agree a transition deal could result in export losses in 2019 of £30 billion for goods and £36 billion for services. In real terms this would mean a drop of 6% for total exports on the previous year, according to the research.

The report predicts that the level of inward investment in British companies would fall by 8%.

David Davis said at the weekend he was “pretty sure” he could strike a deal with his opposite number in Europe, Michel Barnier, but he was not “certain”.