The U.K.'s economic rebound in 2021 could be hampered by a potential no-trade-deal Brexit, which may even lead to significant social unrest or extreme market volatility that risks investor confidence, S&P Global Ratings said in a report published Dec. 15.

The rating agency's base-case scenario for Brexit still sees the EU and U.K. agreeing to a limited-tariff, quota-free trade agreement by the end of 2020, when Britain leaves the EU single market and customs union.

Failure to reach a trade deal would damage U.K.-EU trade as the two economies revert to World Trade Organization terms. This could put further pressure on the British economy through an increase in tariffs on exports to the EU, a depreciation in the pound sterling, and weaker flows of foreign direct investment into the U.K., according to S&P Global Ratings.

"After four years of equivocation, a failure to reach agreement would not be a total shock, even as our base case remains that a deal will be agreed," S&P Global Ratings credit analyst Paul Watters said. "And from a credit ratings perspective, we would consider it to be an additional headwind on top of the difficulties stemming from COVID-19."

In the absence of a trade deal, the U.K.'s GDP is forecast to expand by 4.6% in 2021, weaker growth than the 6.0% projected by S&P Global Ratings under an agreed-upon trade deal. The rating agency expects U.K. economic activity in 2023 to remain 1.4% short of levels that could have been attained with a core deal in place.

S&P Global Ratings said smaller companies and supply chains highly dependent on frictionless U.K.-EU trade, particularly in the food retail, autos, aerospace and defense, and chemicals sectors, would be the most affected by a no-deal Brexit.

"We do not expect the lack of a deal to trigger widespread rating actions in the near term, as our analysis has already factored in some degree of disruption," the rating agency said.

The U.K.'s sovereign ratings could come under downward pressure if the economic recovery turns out to be significantly weaker than currently expected, making fiscal consolidation "more challenging," according to S&P Global Ratings.

"This could happen, for instance, if merchandise and services exports from the U.K. lose access to key European markets for a prolonged period," the rating agency said in a bulletin published Dec. 14.