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Brexit Britain Faces Stagflation, Company Defections to Europe: Analysts

Investors fear uncertainty over the two-year Brexit talks and whether there would even be an agreement between Britain and the EU by April 2019.
Image: Britain's Prime Minister Theresa May triggered the Brexit process Wednesday.
Britain's Prime Minister Theresa May triggered the Brexit process Wednesday.PETER NICHOLLS / Reuters

With the clock now ticking on Brexit talks, analysts expected the U.K. would face an economic slowdown, stagflation and corporate defections.

Sarah Hewin, chief economist for Europe at Standard Chartered Bank, told CNBC's "The Rundown" on Thursday that investors' main concern was the lack of clarity on negotiations and whether there would be an agreement with the European Union by April 2019.

On Wednesday, the U.K. triggered Article 50 of the Treaty of Lisbon, which began the formal two-year process of Britain's departure from the EU.

"The EU is the U.K.'s most important trading partner. If we can continue to get some access to the single market that's going to be very important for a lot of businesses that have invested in the U.K. with a view really to having access to the EU market," she said. "It's unlikely that we're going to get a trade deal done in two years' time."

Hewin added that many companies doing business in the U.K. were unlikely to wait the full two years before deciding whether the pull the plug on some or all of their operations there.

Related: What to Know as U.K. Triggers Brexit Divorce Clause

"We're starting to see some businesses already making contingency plans about opening up in a different EU country," she said. "I think that the deadline for many businesses is going to be by next March. If there's only one year to go between potentially losing access to the single market, then businesses will need to know one way or another and if there's still uncertainty at that point, say March 2018, then I think that contingency plans will be enacted."

Other analysts expect deeper damage to the U.K. economy.

"We look at it as approximately a loss of between two and three percentage points of GDP, which Is massive, over a period of years," David Roche, global strategist at Independent Strategy, told CNBC's "Squawk Box" Thursday.

He noted that while the U.K. has a trade deficit with Europe, it has a surplus when it comes to services, as it benefited from access to the single market.

Related: Inside a Once-Prosperous Town That Backed Brexit

"It comes from the fact of course, if you want to have legal advice on how to buy sausages and export them to Vietnam from Germany, you actually go to a London firm of lawyers. Well, you won't anymore," he said.

Britain's Prime Minister Theresa May triggered the Brexit process Wednesday.PETER NICHOLLS / Reuters

Roche was also sharply skeptical of claims that the U.K. would be able to replace its trade relationship with the EU through deals with other countries such as the U.S. or China.

"Trade deals take five to ten years to negotiate; they take a longer period to have an effect and frankly the idea that you can replace such a dominant partner in which the whole of your service sector and your industry sector is highly integrated by just jumping on a plane to China is absolute nonsense," he said.

Additionally, Roche expected stagflation would emerge in the U.K.

"The U.K. is going to have higher inflation from weaker sterling, because it will weaken when the negotiations get tough. And as that inflation happens, then it will bite into real income," he said.

Roche expected that the bite would be felt both by companies which wouldn't be able to make up the difference by trying to boost exports from a weaker pound and by households which are highly indebted and seeing their income eroded in real terms.

"So the growth rate comes down. Whether it drops or comes down, you're nevertheless going to be looking at something close to stagflation," Roche said.

The pound has dropped from as high as $1.50 just before the vote to exit the European Union to as low as $1.1979.

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