THE new Prime Minister takes up residence at No.10 today, writes Oliver York.

Theresa May succeeds David Cameron after one of the most dramatic, and at times chaotic, weeks in British politics.

Having maintained a low profile during the EU referendum campaign, while ostensibly arguing to remain, Ms May's biggest task now will be as a unifying force.

We are watching closely to see how determined Ms May is to ensure British companies trade freely with the single market, particularly if the conflict over regaining control over immigration is as irreconcilable as European leaders claim it is.

How will the negotiations evolve?

THE uncertainty prompted by the referendum result has increased the chance of recession and prolonging that uncertainty will increase that risk further.

But the most damaging outcome would be for the UK to give up access to the single market without alternative trading arrangements in place.

The imposition of tariffs on highly-integrated intra-EU trade would be likely to significantly increase some business’s costs.

Tariffs would be levied on final products exported to the EU and almost certainly on many imported goods - some of which might be components of the UK’s subsequent exports.

According to the Open Europe thinktank, only 37 per cent of the value of a UK-built car is sourced from the UK.

To the extent that the remaining 63 per cent comes from the EU it could be subject to new tariffs, as would the value of any final vehicles sold into the EU.

The greatest challenge for the UK making a free trade deal with the EU is that the majority of the UK’s exports are services.

It is much more complicated to liberalise services industries without significant harmonisation of regulations.

Services are less likely to be an irreplaceable component of the supply chain than some precision engineered components or speciality chemicals.

Also, the French in particular have been keen to express their desire to tempt services firms to relocate to Paris.

Opinions are divided on the feasibility of this.

On the one hand services firms are theoretically totally mobile, not requiring proximity to any mines or ports or anything like that.

On the other hand, the clustering of businesses in London creates a barrier to mobility.

Overall we remain of the view that a bilateral deal between the EU and the UK would be too time-consuming to negotiate, especially for a country which has had no need for trade negotiators for some decades.

Filling the power vacuum

MARK CARNEY, Governor of the Bank of England, has suggested “the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer.”

To some extent the markets had already reached this conclusion, leading to strong bond market performance.

Mr Carney’s words strengthened their convictions.

A failure to agree new trading arrangements, or an indication that they are likely to result in tariffs, would increase the chances of a prolonged reduction in investment with likely recessionary consequences.

By contrast the speedy resolution of the Conservative leadership contest, resulting in a policy agenda with a focus on retaining unrestricted access to the single market, will be seen as more positive for the economy.

Outlook for markets

WHILE economic uncertainty continues the pound is likely to remain weak, bond markets are likely to remain strong on expectations that interest rates will fall, and large companies with defensive overseas revenues will continue to outperform small and mid-sized companies which are exposed to the UK economy.

Joining the EEA would solve many of these issues.

But, recognising that doing so conflicts with the seemingly higher priority of restricting immigration, investors and businesses are naturally going to remain cautious.

Oliver York is an investment manager at wealth management firm Brewin Dolphin, in Newcastle.

The opinions expressed in this article are not necessarily the views held throughout Brewin Dolphin. No director, representative or employee of Brewin Dolphin accepts liability for any direct or consequential loss arising from the use of this document or its contents. Any tax allowances or thresholds mentioned are based on personal circumstances and current legislation which is subject to change.