BANK OF AMERICA: Theresa May's Brexit plan means 'lower incomes all round'

LONDON — Prime Minister Theresa May’s plan for a “hard Brexit” will lower UK incomes and cost up to 10% of GDP over 15 years, according to analysts at Bank of America Merrill Lynch.

In a note to clients, the US investment bank highlighted the economic benefits of the customs union and single market, as well as the costs of leaving.

Free trade via the customs union with the EU “has been a key driver of rising average living standards in recent decades (though of course there is much debate about the distribution of income),” analysts led by global economist Ethan S. Harris said in the note. “So cutting trade with the EU would be economically negative in our view.”

Meanwhile, the single market “helps economies of scale,” the analysts said. “The UK attracts foreign direct investment from abroad in part because of its membership, which often boosts productivity by bringing in external expertise.”

“So exiting both the customs union and the single market would therefore be economically costly: it would introduce frictions to UK/EU trade that do not currently exist, which means reduced trade volumes between the UK and EU and therefore lower incomes all round.”

Prime Minister Theresa May confirmed that Britain plans to leave the single market as part of its withdrawal from the European Union in a speech on Tuesday.

The prime minister told an audience of foreign diplomats and ambassadors that she would terminate Britain’s membership of the free-trade area to have full control over immigration from the European Union.

This was confirmed by Chancellor Philip Hammond, who told the House of Commons on Tuesday morning that Britain would no longer be in the European single market once the Brexit deal is finalised. “We will go forward understanding we cannot be members of the single market,” he said.

“What will be the precise economic costs? No-one can be sure because there are no recent precedents for this type of action,” Bank of America said. “But the evidence suggests that the costs will be large, of the order of 5-10% of GDP over perhaps 15 years. This is one reason we are pessimistic about UK trend growth.”¬†

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