Prime minister (PM) Theresa May’s negotiating position on Europe increases the risk of a ‘hard Brexit’, according to analysts at Bank of America-Merrill Lynch (BAML).

May, who pledged to begin the UK’s exit from the EU by triggering Article 50 in the first three months of 2017, wants more controls over immigration and freedom from EU courts while retaining access to the single market.

‘Delaying Article 50 until 2017 was one factor (others being Theresa May’s quick elevation to PM and Bank of England’s actions) that we think has helped UK economic data to recover since July,’ writes BAML UK economist Robert Wood.

‘Triggering Article 50 could provide a new shock. Some firms are already delaying investment but announcing an Article 50 timetable could catalyse more companies to take action: one reason we expect UK growth to weaken next year.’

Wood expects the UK to negotiate a ‘free trade deal’ with the EU, which would involve tariff-free trade in goods and services. However, because free trade deals typically take longer than two years to agree, there would also need to be some transitional agreements to bridge the gap between the UK’s expected exit in 2019 and the completion of a deal.

Also, Wood argues true free trade in services is more difficult to achieve because non-tariff barriers like admin procedures and rules and regulations can form a further barrier to competition across national boundaries.

‘So it would be inferior to single market membership and economically costly to the UK: we assume the lost trade would detract 2.5% from GDP in the long-run,’ adds Wood.

Brexit advocates argue this downside could be mitigated by expanding trade relationships with countries outside Europe. (WC)

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