Brexit: Norway-style deal with EU would help UK avoid recession

Norway, Iceland and Liechtenstein are all members of EFTA and the EEA, but not the EU. Photo / Getty Images

Britain must pursue a Norway-style agreement with the EU if it is to avoid a damaging recession, according to Morgan Stanley.

The bank said negotiating membership of the European Economic Area (EEA) and retaining access to the single market would help the UK to secure a "civilised divorce" from the EU.

Jacob Nell, Morgan Stanley's chief economist, said such a deal would be "less disruptive" for the economy.

Rejoining the European Free Trade Association (EFTA), of which the UK was a founder member, would create a pathway into the EEA that would help it to navigate the "radically new world in which we live", he said.

Giving businesses and consumers a clearer idea of Britain's future relationship with its biggest trading partner would also boost consumer confidence, encouraging them to spend rather than increase saving.

"A nice divorce might be that the UK accepts some level of free movement and EU regulations and has fairly full access to the single market - a Norwegian model world which would be less disruptive economically," said Mr Nell.

"In that world we think that the hit to the currency, to demand, to future supply would be relatively constrained."

Under this scenario, the Bank of England would keep interest rates on hold at 0.5pc because the hit to growth would not be as big as feared, Mr Nell said.

"It may be that the resilience of the consumer, backed by an economy that's almost at full employment will keep us just out of recession."

By contrast, an "acrimonious divorce", characterised by political stand-offs and a "hardening of options on each side" would trigger a "referendum recession" by the end of the year, Morgan Stanley said.

A technical recession, defined as two straight quarters of falling economic output, would drag down growth in 2017 to just 0.5pc under this scenario, which would be the slowest pace since 2009.

By contrast, a smoother separation from the EU would see growth slow to 1.3pc next year.

David Cameron, the prime minister, has described the decision on how Britain can get the best possible access to the single market as "one of the single most important decisions that the government must take on".

He told Parliament on Monday: "We must bear in mind the importance of safeguarding our economy, its trade links and its jobs, and I think that will be a very serious consideration."

Norway, Iceland and Liechtenstein are all members of EFTA and the EEA, but not the EU. While theses countries adopt a share of rules from Brussels, agriculture, fishing, customs, justice and home affairs are excluded.

Switzerland is also an EFTA member, but is not part of the EEA.

We must bear in mind the importance of safeguarding our economy, its trade links and its jobs, and I think that will be a very serious consideration.

Mr Nell recognised that securing the "Norway option" for the UK, which would require it to accept free movement of people, would be difficult - and could increase the popularity of UKIP if the government did not win some restrictions.

"There are more than 17m voters for Brexit out there - some of whom might feel their wishes have been misinterpreted," he said.

He said suggestions by some Brexiteers that Britain would be able to secure free movement of UK citizens in the rest of the EU and access to the single market while restricting the ability of EU citizens to enter the UK as an "impossible set of demands".

A Norwegian or Swiss-style agreement might be "politically difficult for a UK that's voted for control over borders", he said.

This could force Britain to trade under World Trade Organisation rules, which involve higher tariffs, for a "period of time" while a deal is thrashed out.

Mr Nell said: "I would expect the EU position to be: 'in is in, and out is out', so you can accept EU regulations and free movement and have access to the single market, but if you don't accept those then your access to the single market will be correspondingly reduced."