Six reasons why a soft Brexit is looking more likely

Stopwatch

The summer might be traditional silly season - for example, the time of year when articles about pets might suddenly dominate the news.

But for one analyst firm the events of the summer have added weight to their view that a hard Brexit is out and a soft Brexit is almost certainly the only way forward.

Six developments have occurred during the summer which means the government will now do what it can to "make concessions required to preserve unfettered access to the single market after formally leaving the EU in March 2019", Pantheon Macroeconomics argues.

1: Economy

The UK's output has slowed to the slowest rate in the G7, inflation has slowed growth in household spending to 0.1 per cent and business investment is flat while net trade has failed to offset the domestic slowdown. All that means "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".

2. Immigration

Last week's data showed that the numbers coming into the UK have dropped off to a three-year low, reducing the pressure on the government to put immigration curbs above economic interests. Migration is expected to drop further, partly in response to the slump in the pound, which will make the country less attractive to foreign workers hoping to send cash home. Continued uncertainty about the future settlement rights of new migrants also will dissuade job-seekers from coming to Britain. Fewer people are concerned about it - a quarter of people now say it's in their top two concerns, down from nearly half at the time of last year's referendum.

Meanwhile a Migration Advisory Committee report on the costs and benefits of student migration to the economy "might lay the ground for a soft Brexit in which free movement persists in all but name".

3. Ticking clock

"The government no longer has time to negotiate a bespoke trade deal," says Pantheon. Given that the divorce bill has to be agreed before talks can progress to trade, it's looking increasingly unlikely that they won't be concluded by October. The hope is that a December deadline can be met but that would still only leave nine months to strike the agreement, as it will take about six months for EU member states to ratify the deal with their national parliaments.

"Trade deals usually take years, not months, to thrash out, so the only realistic way the UK 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," the analyst said.

4. The lady is for turning

Theresa May has lost power following her dismal election results and has softened the rhetoric around a Brexit deal to such an extent that she's stopped saying "no deal is better than a bad deal". Pantheon also notes that last week's position paper conceded that some continued oversight from the ECJ would be a price worth paying for a smooth transition.

5. Labour's shift

Labour's long-awaited clarification on where it stands over Brexit finally means there is an opposition pushing for a transition period of up to four years, during which Britain would remain in a customs union and single market. This has "greatly increased the leverage of pro-Remain Conservative MPs over the government", Pantheon argues. The government is now "vulnerable to a rebellion by only a few ardent Remainers".

6. Trade brush off

So far, the UK has received only "lukewarm" responses to its trade overtures. Japan, where the Prime Minister is currently, has said its priority is completing a deal with the EU first, as has Australia. The UK's efforts to court India resulted in a lapsed bilateral investment treaty. Although although Trump tweeted enthusiastically about future trade deals, those who are actually conducting discussions believe the focus will be on "providing commercial continuity for U.S. and U.K. businesses as the U.K. leaves the EU before moving on to a "potential" trade deal much further in the future".

Pantheon doesn't believe the road to soft Brexit will be straightforward, expecting ministers to take a hardline stance during the Conservative party conference while the EU will play hardball over the timing.

"But 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.

"If so, we see scope for the U.K. economy to pick up pace in 2019 as sterling revives and businesses undertake postponed investment, finally paving the way for the MPC to raise interest rates."

Full story: Six reasons why a soft Brexit is looking more likely: City A.M.