REPORT
By Gökhan Kurtaran
London letter, March 6

-Scotland refendum is back in risk basket

Referendum calls in Scotland are back in the risk basket and will be closely watched by the markets. Scotland’s First Minister Nicole Sturgeon and the leader of the Scottish National Party (SNP) had already said directly after the EU referendum that another independence referendum would be highly likely as Scotland voted 62 to 39 percent to remain inside the EU. Scotland’s biggest fear is that the country will not have access to the European market as a result of a “no deal” which is thought to be better than a “bad deal” according to U.K. Prime Minister Theresa May. Is Sturgeon merely playing the best card she has in her hand to get more from Westminster?  And is she serious about leading the country to independence with another referendum? The answers to these questions are hard to predict. However, it is certain that the recent Scottish referendum talks have added new risks to the economic outlook.

According to George Eaton from The Newstatesman, “if Sturgeon wants a second referendum, she will need May's consent. The power to stage a binding vote continues to reside with Westminster.”

However, despite calling the SNP’s call for independence an obsession, May still has not clearly ruled it out. It is possible that she considers that this would enlarge support for the SNP and for Sturgeon in the long run.

The fact that the Scottish economy has been struggling on the back of falling oil prices should also be considered. In August last year, the gap between Scotland’s public spending and tax revenues widened, with the crash in global oil prices leading to a deficit of nearly £15 billion. According to expenditure and revenue Scotland (GERS) figures, in 2015 North Sea oil tax revenues fell from £1.8 billion to £60 million.

 

-Service sector growth slows down

While the U.K. is heading to historic moment by triggering article 50 this month, some recent data shows signs of further weakening in the economy, such as data last week from the IHS Markit and the Chartered Institute of Procurement and Supply (CIPS). According to this recent data, growth momentum in the service sector continued to slow in February after a 17-month peak in September 2016.  The sharp slow down in the service sector was mainly driven by the fall in the value of sterling and rising input costs.

“The U.K. service sector continued to lose momentum in February, which causes concern that the main driver of growth in the U.K. economy is losing some vitality,” CIPS director of customer relationships, Duncan Brock said.

It is important to note that the service sector in the U.K. accounts for nearly 78.4 percent of gross domestic product. Accordingly, it will be significant to see whether the slow down will continue at a higher pace in the upcoming months.

06 Mar,2017

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