Brace yourself for a Remain recession

Britain is staying in the EU until at least October – maybe forever, says Matthew Lynn. That spells economic disaster.

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Britain is staying in the EU until at least October maybe forever. That spells economic disaster.

Brexit has been delayed. Whether we end up actually leaving at the end of October, as recently agreed, is anyone's guess. It is hard to see how any Withdrawal Agreement will ever be passed by Parliament, and the EU seems to be willing to delay the process indefinitely. Unless there is another referendum, or a change of government, there doesn't seem to be a route out of the impasse. We may well be a half-in/half-out member for years to come.

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The economic consequences of Bremain

After all, if membership of the single market is so important for the economy, as they maintain it is, then surely staying inside should give a boost to growth? The trouble is, they were wrong about the consequences of leaving, and they are going to be wrong about the consequences of staying as well. Why? Here are four reasons.

First, and admittedly this is only a short-term impact, any stockpiling in advance of Brexit will now be unwound. There probably was not as much of it as some of the scare stories suggested, but some companies have built up stocks of anything imported from Europe ahead of what might have been a disruptive hard Brexit at the end of March. That will have given a temporary boost to demand in the first quarter of the year. If leaving has now been shelved indefinitely, companies are going to run down those inventories as fastas possible. No one wants to have lots of stuff sitting around in warehouses. As that unwinds, it will depress growth.

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Next, and this is more important, the uncertainty will be prolonged. If we had left, it is likely the issue would have been buried for a long time. The country could have gone back to discussing housing, health, education, transport, taxes, competitiveness, and all the other things that probably matter a lot more. If we

re-run the referendum and there is a decisive Remain vote, we could also move on. But if we are a half-in/half-out member for years, with an endless angry debate about our relationship with the EU, then politics will remain chaotic, with the constant threat of a change of prime minister or government. Does that sound good for business confidence? Not really.

Thirdly, watch out for a rise in interest rates. The threat of a chaotic Brexit has unquestionably persuaded the Bank of England to keep interest rates at close to record lows for far longer than it otherwise would have done. With record employment and rising wages, and with leaving the EU off the table for the moment, it is hard to see any reason why rates should not be normalised. Expect them to start climbing to at least 2%. That will hit growth.

The EU's new, unwelcome harmony

In the past, the British could team up with the Dutch, the Finns, or the Poles to block many of the centralising anti-business proposals coming out of Brussels. But without a major country to fightback against them, the EU is inevitably going to move towards more and more regulations. British businesses will still have to comply with those rules, and that will hurt our competitiveness.

Despite all the warnings, voting to leave the EU didn't do the country any harm.It is unlikely that actually getting out, even without a deal, would have done anything more than short-term damage either.There might have been some disruption, but it would have sorted itself out very quickly. But staying in as a disgruntled, semi-detached member almost certainly willhurt our economy and a Remain recession may be just around the corner.

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