Comment: Dire predictions of referendum relapse

First, the positives. There is broad agreement that growth north of the Border has gathered pace and strength over the past 12 months. The Fraser of Allander Institute has raised its growth estimate on three successive occasions to 2.5 per cent for 2014. The Ernst & Young ITEM Club is predicting 2.8 per cent. And while this is less than the UK average of 3 per cent, this will still be Scotland’s strongest year of growth since 2007. Gary Gillespie, chief economist at the Scottish Government, concluded his assessment this summer, “against a backdrop of nearly two years of sustained growth, we have also seen an improving picture in the Scottish labour market with increases in employment, and reductions in unemployment and economic inactivity… The overall picture is of the economy continuing to strengthen and there is now a more confident outlook for 2014 and beyond.”

That view has been validated by subsequent labour data showing employment in Scotland at a record high, rising by 63,000 over the year to stand at a rate of 73.5 per cent – higher than the UK rate. The number of people out of work in Scotland fell by a further 2,000 to 6.4 per cent in the last quarter.

The latest Bank of Scotland August PMI report shows business activity rose “solidly” during the month and that there was a “robust” increase in incoming new business. The report also showed that employment in Scotland rose for the 21st consecutive month – and that August’s increase was the most marked since February, greater than the UK average. Indeed the biggest problem in recent reports has not been a shortage of jobs in the private sector but a shortage of applicants to fill the advertised posts.

On the retail front, last month saw shopper numbers in Scotland 1.8 per cent higher than a year ago and above the whole UK, where shopper numbers were down 1.1 per cent.

Until the last few weeks, we were going into a momentous decision with the economy on a clear upturn. But now there is growing evidence of stalled investment, uncertainty over business expansion and a faltering of business confidence. WPP’s Sir Martin Sorrell may talk of an independent Scotland as “a new Singapore”. Possible – but not, in the view of many Scots businesses, at all likely. Indeed, it is a No vote that would probably prompt a fillip to confidence as uncertainty is removed.

So what are prospects if the outcome is Yes? The movement of head office registration of Scottish banks announced last week is a devastating blow to Scotland’s financial sector and many of its customers. Remember all those earnest drives over the past 20 years to attract head office functions to Scotland? There’s a real risk now of Scotland being reduced even further to a branch economy – more, not less, dependent on decisions taken in London.

Here is what analysts at some major investment banks have been saying in the past week. Deutsche Bank pulled no punches in heading its assessment: “Be afraid, be very afraid.” The implications of a Yes vote, it began “would be huge, and are magnified by the sense of institutional unpreparedness. A Yes vote could easily derail the UK economic recovery.” It said it could cause a “destabilising crisis” in the banking system and at best leave the rest of the UK with an unstable currency union during talks on the new fiscal and monetary arrangement.

Not to be outdone, Andrew Garthwaite of Credit Suisse bordered on the apocalyptic in his assessment of a Yes vote. There would, he warned, be a huge outflow of deposits from the country. The re-domiciling of financial and public sector jobs south of the Border would exacerbate the situation. The only way to recover would be through a currency devaluation or a massive internal devaluation with a large rise in unemployment – or more likely a combination of the two.

For the rest of the UK, the main pain would be felt through a sterling devaluation. However, a weaker pound would help both Scottish and UK large exporters – good for Diageo and AG Barr. It is also likely that an interest rate rise would be postponed. Beyond the vote, the prospect of a UK referendum on EU membership would extend the period of uncertainty, volatility and sterling weakness.

Citigroup foresees a troubled outcome for the new Scottish economy and warns that overall uncertainty about the structure of independence will probably weigh on overall growth in the UK. Companies domiciled in Scotland could be faced with a higher cost of capital, which would mainly affect financial services. They, too, forecast weaker sterling.

Investment bank UBS looked specifically at the gilt market. Although it expects some short-term volatility – for which read higher yields – it expects gilts to be supported by a postponement of interest rates, and believes a Scottish repudiation of its share of the UK’s debt to be near impossible owing to the loss of credibility and thus subsequent difficulty in raising new funds.

Wealth management giant Investec notes there are around 20 quoted UK companies of any size with a Scottish HQ / registration, but only AG Barr is likely to be significantly Scotland-focused and be affected (a winner?) were Scotland to change currency. Others could face additional legal and administrative costs. Names of note include SSE, Lloyds, RBS, Stagecoach, FirstGroup, Cairn, Aggreko, Aberdeen, Standard  Life, Wood Group and Weir. Oil  and gas producers may also be affected by changes to taxation and licensing.

Sectors that may be beneficiaries include airlines (Scotland committing to halve air duties) and – irony of ironies – London-centric real estate, which might see relocation of Scottish headquarters. Such is the roulette wheel of unintended consequence.

For the week ahead at least, hang on, hold tight – and stay calm while the wheel of fortune spins. «