Bank of America predicts mild recession due to drawn-out EU negotiations

Uncertainty over future trading relationships between the UK and EU post Brexit increases the likelihood of a mild UK recession, according to a report by a Bank of America.

However, in the short-term the swift appointment of the new Prime Minister (PM) Theresa May was meant to calm the waters, the broker said.

The unexpected appointment “should cut political uncertainty and reduce some of the downside economic risks following the Brexit vote,” analysts Robert Wood and Sebastien Cross said in a research note published on Thursday but dated 13 July.

Nonetheless, there was still a long way to go post Brexit, with the divorce proceedings set to take place over several months. The PM might see this as a sensible move from a negotiation perspective, but it could lead to a slowdown of economic growth as firms and consumers engaged in a “wait-and-see” strategy, they argued.

Negotiations were likely to be difficult and drawn out given that the EU states were going to be tough on the UK, with a view to deterring other states from thinking that leaving was a good idea. Another factor delaying negotiations was the differing opinions between EU states on the type of exit deal the UK should get.

Given these obstacles, the commercial incentive of trading with the UK may be quite weak, the report read.

EU governments say that negotiations will not commence until the UK has formally left the EU, which according to newly appointed Transport Secretary Chris Grayling would not take place until 2019.

Forecasts for a mild recession stemmmed from the possibility of the UK ending up on worse trading terms with the EU, which BoA estimated could hit GDP by 3%.

Theresa May had confirmed that Brexit would go through but provided guidance on how she was going to go about it. In order to negotiate a full single market, free movement of labour may be a requirement which could be an issue given May’s strong opposition to migration while she was Home Secretary.

Newly-appointed Secretary of State for Exiting the EU David Davis said May preferred to accept less single market access rather than compromise on migration controls.

This “Norway-minus” deal which gives more immigration control for a bit less single market is unlikely to be stable in the long run, according to BoA.

The report also said former Chancellor George Osborne’s initial plan of cutting UK corporation tax would negatively affect negotiations with EU leaders.

His new replacement, Philip Hammond, said that he would not commit to this plan, The Independent reported.

"We need to make sure that the UK remains an attractive investment prospect for companies from overseas," said Hammond.

He also suggested it could take up to four years for negotiations to be completed.