UK starting to have second thoughts about Brexit as economy faces recession

Even after years of division and vitriol, it seems like Britain still needs to talk about Brexit.
 

More than six years after voting to leave the European Union, the UK is facing a prolonged recession and a deep cost-of-living crisis. Last week’s Autumn Statement heralded years of higher taxes and cuts to public spending. 

The gloomy prognosis has re-opened the debate over Brexit, previously the deadly third rail of Conservative Party politics, which many thought ended for good with the signing of a free trade deal at Christmas 2020.

Days after being forced to accept sweeping changes in fiscal policy, Brexiters were last weekend confronted with a Sunday Times story that said senior figures in Prime Minister Rishi Sunak’s government are seeking a closer “Swiss-style relationship” with the European Union.

The language angered hardliners who oppose anything that trades away Britain’s newly won regulatory freedoms. Yet the very fact that the possibility was broached in public -- and attributed to a senior government source -- is a departure from the bombastic “have cake and eat it” era of Boris Johnson or the short-lived low-tax vision of his successor, Liz Truss.

Chancellor of the Exchequer Jeremy Hunt has privately said that the UK should seek a closer trading arrangement with the EU, in line with the Sunday Times report, multiple senior government figures familiar with his thinking said. In the first sign of dissatisfaction with Hunt from within Sunak’s camp, one senior official criticized the chancellor for speaking too loosely.

A spokesman for Hunt declined to comment. Hunt’s views have been over-interpreted by the media, people familiar with his thinking said.

Changing Times
 

Yet Hunt’s tone mirrors a shift in public attitudes, with a new poll of polls overseen by UK elections guru Professor John Curtice showing that Britons reject Brexit by 57% to 43%. Last week, YouGov Plc reported that a record high 56% of respondents now believe Brexit was wrong. Some 19% of those voted for Brexit but now regret their choice, YouGov said.

“There is a gradual, slow erosion of support for Brexit,” said Curtice, professor of politics at Strathclyde University, in an interview. 

The current government -- in power for 12 years -- simply isn’t very popular any more, Curtice noted, and faces a demographic problem. “With every cohort of 18-year-olds who enter the electorate, there are more people who are pro-EU.” 

For now, though, Brexit remains divisive enough to force the prime minister -- a long-term Brexiter who backed Vote Leave in 2016 -- to speak out on Monday.

“Under my leadership the United Kingdom will not pursue any relationship with Europe that relies on alignment with EU laws,” Sunak told the Confederation of British Industry’s annual conference. Regulatory freedom, he said, is “an important opportunity of Brexit.”

Sunak’s clear and rapid rebuttal was cheered by David Frost, who served as Boris Johnson’s lead negotiator and called Sunak’s remarks “welcome and reassuring.”

Others were less convinced. In a message to the Conservative MPs’ WhatsApp group on Sunday, seen by Bloomberg, former Cabinet minister Simon Clarke told colleagues that the Treasury has a “long-held ambition” to align the UK with EU rules in order to secure the economic benefit of access to its markets.

Parliamentary arithmetic also matters. Many Conservative MPs elected in 2019 are pro-Brexit, making any new overtures to Brussels unlikely before the next election, due by Jan. 2025, multiple Tories said. Brexiteer MPs would attempt to oust Sunak if he tried that, one MP claimed.

Even so, the European Research Group of hard-line Brexiters, a thorn in the side during Theresa May’s premiership, is not the force it once was. Erstwhile ringmaster Steve Baker is now a minister, and last month the group could not agree on who to back for prime minister.

Few expect a dramatic policy shift anytime soon. Those involved in ongoing talks over Northern Ireland’s post-Brexit status on both the UK and EU side were surprised by the reports, with one EU diplomat saying a Swiss-style arrangement is not on offer. Two EU sources told Bloomberg they felt the proposal was aimed at testing appetite in the UK -- and within the Conservative Party -- for deepening the UK-EU economic relationship.

Unsettled Times
 

That question is becoming ever more relevant as the economic backdrop darkens further, and as experts break cover to speak up about the consequences of Brexit.

Last week, former Bank of England rate-setter Michael Saunders told Bloomberg TV that the “UK economy as a whole has been permanently damaged by Brexit.” 

Current BOE policy maker Swati Dhingra told lawmakers last Wednesday: “It is undeniable now that we are seeing a much bigger slowdown in trade in the UK compared to the rest of the world.” 

 

According to the Office for Budget Responsibility, Brexit will reduce UK GDP by 4% over the longer term. Analysis by Bloomberg Economics shows the UK lagged the trade performance of other big nations before the pandemic -- and has failed to fully share in the rebound since then. 

Economic growth has been stronger than in Italy and Germany, according to OECD data. But measuring living standards in the biggest European economies, only Spain has performed worse than the UK.

 

Markets have suffered too. Sterling has fallen 10.5% against the trade-weighted basket of currencies, 20% against the dollar and 11% against the euro. Earlier this month the Paris bourse overtook the London Stock Exchange in market worth. In 2016, British stocks were collectively worth $1.5 trillion more.

The volatility has unsettled businesses, which are battling inflation at four-decade highs while they struggle to recruit staff amid a tight labor market.

Speaking at the CBI conference, Sarah Pollard, chief financial officer of PZ Cussons Plc, said that Brexit had a “very clear impact on access to talent and consumer confidence.” A closer “tie-up with Europe” would create more “resilience and buoyancy” in the economy, Pollard said.