UK Economic Watch: Beginning of long, difficult story

The earlier than expected appointment of a UK prime minister – Theresa May – should cut political uncertainty and reduce some of the downside economic risks following the Brexit vote. Our forecasts are unchanged; we had not factored in extreme political uncertainty in our base case.
But still only at the start of Brexit process
While some uncertainty has been resolved, there is a long way still to go with Brexit. The big issues remain. Waiting to trigger formal EU divorce proceedings for several months, as PM May has suggested, may be sensible from a negotiation perspective but it will likely encourage firms and consumers to prolong their wait-and-see approach to spending. Even when divorce proceedings are started, negotiations will likely be difficult and protracted: the incentives of other EU states to be tough on the UK in order to discourage Euroscepticism at home points that way.
And future trade terms remain highly uncertain
Uncertainty about future trading relationships drives our forecast of a mild UK recession. New Prime Minister Theresa May has said “Brexit means Brexit”, but has given little guidance on the key trade-off: full single market access requires accepting free movement of workers. May has previously taken strong positions on limiting migration. Chris Grayling, one of the politicians the media speculate may take charge of Brexit negotiations, has said the UK should aim to exit the EU by 2019.
Good short-term economic solutions seem unstable

EU governments have said there will be no negotiations before divorce proceedings are triggered. Ultimately Britain may eventually be able to negotiate a free trade deal and some sectoral single market access, but that is far from certain and could take a long-time. In any case, any deal preserving some semblance of single market access may be unstable: it would require accepting EU regulations without a say in determining them.

Volatile political times still ahead
The next general election is scheduled for 2020. Various politicians have argued for an earlier vote. Little seems impossible in UK politics now. But PM May has ruled out early elections (and a second referendum). Calling one is procedurally tricky. Either way, volatile political times probably lie ahead as the UK navigates exit. In conclusion: while recent news seems economically settling, the big picture remains: there is a long long way to go on the Brexit process and economic damage still to come.

Bofa Research

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