LONDON — The British economy is stumbling but not stalling — and that carries far-reaching political consequences.

The false prophecies of an economic collapse, aired loudly before and in the days after last year’s referendum on EU membership, have boosted the confidence of hard Brexiteers. A group of them even says a “no deal” with the EU on future relations after the 2019 exit date isn’t a bad thing.

Others, including many in British business, are quietly sorry the economy hasn't taken a hit — if only because to them a hard shock seems the one thing that can sway the politics around Brexit and push the government to strike a favorable trade deal with Europe. If a shock comes, it’ll now probably come “too late,” in the words of one former government insider. The likelier course, economists now believe, is a long-term economic slowdown.

With Brexit, “we didn’t drop the frog in a pot of boiling water,” Commerzbank chief U.K. economist Peter Dixon said. "It won’t be the big one-off hit that tipped the economy into recession like 2008, but it will be a slow strangling of the economy as activity that might have taken place otherwise does not."

Fuzzy numbers

The evidence to support that pessimistic view isn’t always clear-cut. With inflation rising and employment strong, the Bank of England last week hiked rates for the first time in a decade, reversing the 0.25 basis point cut in August 2016 made on the back of their gloomy post-referendum forecast. But, and here’s the catch, instead of a sharp drop in economic activity, the BoE sees Brexit as a long-term drag that Governor Mark Carney said will bring a new, lower “speed limit” for growth.

"The short, sharp shock has simply not materialized and unless there is some incredibly destructive news, it’s very unlikely to," said Amit Kara, head of macroeconomic forecasting at the the National Institute for Economic and Social Research (NIESR). The institute last Wednesday projected the economy over the next five years would slow by an average of a quarter percentage point annually — and only partly due to Brexit. Britain's main problem is weak productivity growth.

There has been more worrying data. The CBI's quarterly Industrial Trends Survey covering the three months before October found that optimism about business conditions fell for the first time in a year, investment intentions have deteriorated and spending plans for buildings are at their lowest since July 2009. Retail sales have slumped at their fastest rate since 2009. Household income is £600 lower than it would have been had Britain voted to remain in the European Union, according to the NIESR report.

"Growth will be 1.5 percent rather than 2 percent, that kind of thing. Over 25 years this will have quite a big effect on Britain’s living standards, but day-to-day it won’t be very dramatic," said Nick Macpherson, the former head of the Treasury under Chancellor George Osborne. "The only thing which could change that is a very hard Brexit indeed. Lorry queues round the M25, planes grounded, that sort of thing. The problem then is it will be too late to do anything about it."

No doom or gloom

So to most people today, Brexit has been an economic non-event. Growth in the third quarter of 2017 — the three months through September — was up slightly to 0.4 percent, beating expectations, but part of a trend in 2017 of slower growth than the long-term average of around 2 percent a year. Wages were up 2.2 percent — the highest since 2012 — but with inflation at 3 percent real incomes fell.

“Individuals don’t really notice the difference between an economy growing at 2 percent to an economy growing at 1.8 percent," said a senior economic expert in one of the major business groups opposed to Brexit. "People notice when the economy goes into recession, but we are not in that territory.”

The absence of something closer to apocalypse is making it harder for proponents of a “soft” Brexit with Europe to get heard.

It’s “undeniable that the projections of doom and gloom have not materialized,” said Nicky Morgan, the Conservative chair of the treasury select committee who opposed Brexit, and argued the avoidance of recession doesn't mean Britain's out of the woods.

“There are two costs to Brexit," she said. "There’s the economic cost — and there will be one. Businesses are clearly not investing as much at the moment because of the uncertainty. But there is also the long-term opportunity cost — the cost of lost opportunities. This will be hard for people to feel in their bank accounts. It’s the business which decides to invest but not in the U.K. That is hard to quantify.”

Morgan warned the government not to let the lack of a crisis allow them to become complacent about the dangers of a mishandled Brexit. "We must not undermine our economy and the last seven years of extremely hard work," she said.

Morgan and the other Tory soft Brexiteers are in a minority in the party, but have strong allies in government, foremost Chancellor Philip Hammond, who is pushing to maintain as much access to European markets as possible. However, the Brexiteers, led by Boris Johnson, Liam Fox and Michael Gove, hold the power to bring down the government should the prime minister stray too far off their preferred course.

Theresa May is trapped in the middle, forced to find compromise between the two camps at every turn.

Business political calculus

The big "downside risk" for the U.K. economy — acting as the caveat in all the forecasts of economic growth — is the uncertainty around the final Brexit package, according to the Bank of England chief Carney.

The main U.K. business groups, which meet the Brexit department, business department and Treasury every two weeks, are united in their demand for a time-limited transition period to be agreed with the EU by the end of this year so companies can plan for subsequent years with certainty.

Yet, the government has sent mixed signals. The prime minister and Brexit Secretary David Davis have raised the prospect of a transition deal on the same trade terms as Britain currently enjoys but that’s politically toxic for many backbenchers and some of May’s Cabinet, as it implies that Britain will de facto remain part of the EU beyond 2019. What is more, the EU side is yet to agree to even discuss these future arrangements.

May’s recent suggestion that this transition arrangement is dependent on settling Britain's future trading terms with the bloc increased anxiety for British business, who want a legally-binding agreement within months to allow them to plan. To leave a transition deal to much later, business leaders warn in public and in private, would undermine the benefits of any such arrangement as they will have triggered contingency plans for a hard Brexit a long time before the final cut-off date.

“Clarification around a transition so late in the day will be like closing the stable doors once the horse has bolted” — Catherine McGuinness, City of London Corporation

In a statement, Catherine McGuinness from the City of London Corporation — one of the main lobbying organizations for the U.K. financial sector — said: “Clarification around a transition so late in the day will be like closing the stable doors once the horse has bolted.” Chancellor Hammond himself told MPs at a select committee meeting that the transition period was “a depreciating asset,” of increasingly limited value to business the longer it takes to agree.

The financial community in the City of London, in the meantime, has felt increasingly abandoned by the May government, City insiders said. Although a Brexit position paper on financial services was expected in September, it never emerged. And those position papers that have been published refrain from saying much about financial services.

“The U.K. services industry accounts for 80 percent of the British economy, serving customers across the country, the EU and globally,” said Miles Celic, CEO of the lobby group TheCityUK. “Financial and related professional services are a significant part of that. Regardless of how or when it is done, it is critical for both the U.K. and the EU to agree how this vital trade can continue and to do so as soon as possible.”

Without a transition agreed early next year there was “a chance” of a recession, one chief economist at one of the major business organizations said on condition of anonymity for fear of wading too far into the political row over Brexit, which has driven a wedge between big business and parts of the Conservative Party, it's traditional backer. “If it happened very suddenly it would have a big impact. If there was a fundamental breakdown and there was no transition agreed by the summer or autumn then the financial markets could turn.”

'No deal' no big deal

Brexiteers in parliament sound emboldened, choosing to focus on the half full glass of Britain’s current economic picture.

Buoyed by record employment levels and continued economic growth, Cabinet ministers have in recent weeks begun talking down the problems associated with a "WTO Brexit," the scenario in which Britain falls back onto the standard international trading rules set by the World Trade Organization.

Members of the Conservative Party's hard-line European Research Group in parliament are privately lobbying British industry groups pushing the merits of a "no deal," one business leader said. "They are trying to convince us that WTO is not bad, but that's not what our members think," said the business leader.

They’re also downplaying the threat to the City of London’s dominant position in European finance. "Do you know how many banks have left for Paris?” one Cabinet minister asked in private recently. “None. It isn’t going to happen.”

Another said: "I'm more confident that we made the right decision today than I was when I campaigned for Brexit in the first place."