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- Pantheon Macroeconomics says changes over the summer mean that Britain could now stay in the single market after Brexit. Chief UK economist Samuel Tombs lays out six reasons for this belief. Reasons include continued economic weakness, a fall in migration, and the Labour Party’s new stance on Brexit.
LONDON – A so-called “soft Brexit,” in which Britain remains within the European single market, is more likely than ever, according to the latest analysis from research house Pantheon Macroeconomics.
Writing in a note circulated to clients, Pantheon’s Chief UK Economist Samuel Tombs lays out six reasons why the British government may decide on a drastic change of course when it comes to leaving the EU as talks progress.
“Six developments over the summer have increased the likelihood that the government will make concessions required to preserve unfettered access to the single market after formally leaving the EU in March 2019,” Tombs writes.
Firstly, the continuing weakness of the British economy over the course of the summer suggests “uncertainty about the UK’s future trade ties is harming the economy.”
GDP grew just 0.3% in the second quarter of 2017, with growth in the first three months even less impressive, leaving the UK languishing as the slowest growing economy in the G7.
Brexit uncertainty has visibly hit both household consumption and business investment, while failing to provide a substantial boost to trade from sterling’s huge drop since the vote.
This, Tombs argues, means that “politicians now can be certain that a Hard Brexit would damage the economy and that a further slump in sterling wouldn’t provide any compensation for the imposition of trade barriers.”
Additionally, immigration to the UK has slowed dramatically since the referendum. Immigration was often cited as the biggest reason for backing Brexit by voters at the time of the vote, but as the future status of foreign workers in the UK remains up in the air, many have decided to leave the country rather than potentially being forced out.
“Continued uncertainty about the future settlement rights of new migrants also will dissuade jobseekers from coming to Britain,” Tombs writes, pointing out that only 25% of people see immigration as one of the top two issues the government needs to focus on. At the time of the Brexit vote, it was closer to 50%, as the chart below shows:
- Pantheon Macroeconomics
Next, time is running out in negotiations, with just over 18 months remaining. This makes the negotiation of a full scale trade deal before Britain drops out of the bloc in March 2019 high improbable.
“Trade deals usually take years, not months, to thrash out, so the only realistic way the U.K. will be able to avoid a cliff-edge is to remain in the single market and accept all the associated financial, legal and migration obligations,” Tombs argues.
Pantheon’s fourth argument to suggest that Brexit is likely to be of the “soft” variety is that the government has softened notably on several key areas of Brexit in recent months. This is particularly true when it comes to Prime Minister Theresa May’s climb down on leaving the jurisdiction of the European Court of Justice.
As Tombs notes, the government’s position paper on the ECJ “conceded that some continued oversight from the ECJ would be a price worth paying for a smooth transition.”
Tombs also writes that the Labour Party’s shift to supporting staying in the single market provides, for the first time since the referendum, a credible opposition stance against Hard Brexit.
Of course, the Liberal Democrats have consistently argued against Brexit, but their tiny number of seats and limited vote share make this opposition ineffectual.
Labour’s backing of a soft Brexit “has greatly increased the leverage of pro-Remain Conservative MPs over the government,” Tombs argues.
Finally, the government’s struggles to get backing for early trade negotiations from non-EU countries has reduced “the potential benefits of leaving the E.U.’s customs union,” Pantheon’s note argues.
A prime example of this is in Japan where officials have signalled that they are in no rush to enter negotiations with the UK.
Prime Minister May is visiting Japan this week and is expected to discuss a post-Brexit trade agreement with Japan’s prime minister Shinzo Abe. However, Japan is currently in talks with the EU about a free trade agreement and has no intention of rushing that negotiation to satisfy the wishes of UK government, the Financial Times reported on Tuesday.
All in all, then, Pantheon Macroeconomics believes that these six reasons have pushed a soft Brexit back to the fore, and made it the “path of least resistance” for Britain.
“When the chips are down, we still think that the path of least resistance for the government will be to agree a long transitional relationship in which the status quo largely remains in place.”