Super Thursday for UK markets

28 April 2021 • 4 mins read

  • This month we upgraded our 2021 UK GDP growth forecasts to 6.0% as fast vaccinations allow the economy to re-open, supporting our view of the GBP rising to 1.44 against the USD.
  • Sterling is also likely to appreciate when the Bank of England starts tapering its quantitative easing bond buying, potentially as early as its next meeting on Thursday, 6 May.
  • The Scottish parliamentary elections, however, will be held on the same day raising the risks of a second referendum on UK membership.
  • The prospects of another vote on Scottish independence would hit the GBP but a second referendum is unlikely to occur for 1-2 years still given the UK government’s opposition.

This month we upgraded our forecast for UK economic growth in 2021 from 4.5% to 6.0%. The government has started lifting its stringent winter restrictions in Q2’21, economic activity has been more resilient in Q1’21 despite the severity of the UK’s lockdown and the labour market has held up better than expected during the pandemic.

Source: Bank of Singapore, Bloomberg

The results will be important in determining the chances of a second referendum on Scotland’s membership of the UK. In 2014, Scotland’s voters rejected independence by 55% to 45%. But in 2016 Britain voted to leave the European Union while a majority in Scotland voted to remain in the EU.

The Scottish National Party (SNP) argues Scotland should now have a second independence vote and will push for another referendum if the SNP gains an overall majority in the Scottish parliament or if pro-independence parties including the Scottish Greens achieve a majority together with the SNP.

The UK government has opposed giving the Scottish parliament the legal authority to hold a second referendum arguing the 2014 vote settled the issue ‘for a generation’. But if the SNP wins an outright parliamentary majority on May 6, London will face strong pressure to relent.

The prospects of a second independence vote would hit the GBP and UK assets. Uncertainty over an independent Scotland’s future currency, its significant financial sector and the stationing of the UK’s Trident nuclear submarines would make investors cautious.

The chart shows the GBP fell from 1.50 to 1.32 on 23 June 2016 when Britain voted unexpectedly to leave the EU. But it will still take up to 1-2 years for a new referendum to be held if the SNP induces the UK government to agree. The risks of a UK break-up would only dominate GBP’s performance closer to a second Scottish vote rather than for the rest of 2021.

Mansoor Mohi-uddin
Chief Economist
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