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What the Scottish election means for the economy, your investments and the pound

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·Contributor
·7-min read
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The SNP have been in power since 2007 and won the lion’s share of constituencies in 2016. Nicola Sturgeon, above, is looking for her party to claim yet another victory, needing to take just four more seats than they already hold to win a majority of 65 in the 129-seat Scottish parliament. Photo: Russell Cheyne/Reuters
The SNP have been in power since 2007 and won the lion’s share of constituencies in 2016. Nicola Sturgeon, above, is looking for her party to claim yet another victory, needing to take just four more seats than they already hold to win a majority of 65 in the 129-seat Scottish parliament. Photo: Russell Cheyne/Reuters

The Scottish election is taking place on Thursday 6 May and voters will be going to the polls to decide the next Holyrood government.

The larger parties in the race include the Scottish National Party (SNP) led by Nicola Sturgeon, Scottish Conservatives led by Douglas Ross, Scottish Labour led by Anas Sarwar, Scottish Greens co-led by Patrick Harvie and Lorna Slaterand, and the Scottish Liberal Democrats led by Willie Rennie.

These are the five parties who won parliamentary seats in 2016.

There are also a number of smaller parties and independent candidates running, making up a total of 25 contesting the Holyrood elections. These include Alba, All for Unity, Freedom Alliance and the Scottish Family Party, among others.

In this election, the electorate will be given two votes, one to choose their constituency member of the Scottish parliament (MSP) and another where they choose a party from the regional list.

After the election this week, MSPs elect Scotland’s first minister, which is usually the leader of the biggest party in the parliament.

The SNP have been in power since 2007 and won the lion’s share of constituencies in 2016. Sturgeon is looking for her party to claim yet another victory, needing to take just four more seats than they already hold to win a majority of 65 in the 129-seat Scottish parliament.

What impact will the election have on the UK economy?

The outcome of the election could have a huge effect on financial markets and the UK economy, particularly if the SNP wins a majority of seats.

This is because Nicola Sturgeon's party, along with the Greens, are hoping for a second referendum on Scottish independence, with the aim for an independent Scotland to rejoin the EU as quickly as possible.

Since Britain voted to leave the bloc, the first minister has openly started pushing for another referendum.

In the first vote in 2014, Scots backed staying in the UK by 55% to 45%, with people saying no to independence as they believe they would stay in the EU.

Two years later Scottish voters backed Remain in the Brexit referendum by 62% to 38%, and many saw this as proof that Scotland needed to release its ties from the UK.

Some polls, including one from Survation, have suggested that the SNP could win a majority of seats on Thursday, while a Panelbase survey revealed that the SNP may just fall short of an absolute majority.

In the event of the latter, the SNP would then rely on support from the Greens for a second referendum, who are expected to pick up seats in parliament, and perhaps any new Alba MSPs.

Watch: Scottish leaders clash over second independence referendum

Analysts have said that a strong victory for the party could put Scottish Independence back on the table which would have a negative effect on investment, as well as creating political uncertainty.

Investment bank Morgan Stanley (MS) has put the chance of Scottish independence from the UK in the next 10 years at 15%, while rival Citi put it as high as 35% last week.

A second Scottish referendum may also mean that companies with headquarters in Scotland might underperform in the short-term and it could also weigh on UK equity flows.

The boss of NatWest (NWG.L) has already said that the bank would move its headquarters from Edinburgh to London if Scotland voted for independence.

Alison Rose warned that an independent Scotland would be too small to support the group, formerly known as Royal Bank of Scotland, which has been based in the Scottish capital since it was founded almost 300 years ago.

READ MORE: NatWest announces £346m dividend despite falling to loss

“The economics of separation would be dire in the short term” Brian Hilliard at Societe Generale Group said.

“The budget deficit of Scotland was several times that of the UK, even before the COVID crisis. Separation would reduce activity considerably, reducing tax revenues and increasing benefit expenditure, placing upward pressure on that already-considerable underlying deficit.”

He added that Scotland, which accounts for 7.5% of the UK’s GDP, would have to present a responsible fiscal policy to the markets, with deep austerity policies, to give it access to necessary funding.

The Conservatives, the second biggest Scottish party, criticised the SNP last week, saying that the party wanted to “rip apart the UK”. They have also warned that the future of the country is at stake, with hundreds of thousands of jobs at risk.

“A hard border won’t create jobs, as the SNP falsely claim, but will instead put half a million Scottish jobs at risk, make foreigners out of friends and family, and end a 300-year-old Union,” Douglas Ross said.

What this means for the FTSE and the pound

If Scotland were to get its independence it would create an issue of what currency the country would use. The future risk of a possible UK break-up could also hold back the pound against the dollar (GBPUSD=X) and the euro (GBPEUR=X).

In 2014, separatists suggested that the pound could be retained as its currency and that Scotland could demand a seat on the Bank of England’s monetary policy committee. However, this suggestion was lampooned.

“An alternative would be to create a new currency then peg it to the pound in a currency board, but that would give Scotland no monetary autonomy,” Hilliard said.

“More likely would be a new currency and a new independent central bank as a precursor to applying for euro membership after entry to the EU.”

The pound and the FTSE 100 (^FTSE) index both suffered a late bout of nerves in 2014 as the first independence vote loomed.

Sterling sank over 6% against the dollar and London’s benchmark index nosedived 12% running up to the vote. They rebounded 3% and 11.5% respectively after Scots voted to stay put.

A pro-independence vote could mean that investors once again shun British stocks.

Campaigners wave Scottish Saltires at a 'Yes' campaign rally in Glasgow, Scotland in 2014 during first Scottish referendum. Photo: Dylan Martinez/Reuters
Campaigners wave Scottish Saltires at a 'Yes' campaign rally in Glasgow, Scotland in 2014 during first Scottish referendum. Photo: Dylan Martinez/Reuters

George Buckley of Nomura said: “An independence result might lead to an FX move of around 5-6% off GBP/USD (roughly half that of the move on Brexit day).”

“But we want to stress that the risk is that it might actually be a smaller move as the market would be much more prepared than it was on Brexit day.”

Another problem would be the issue of trade across borders. Just like the UK carried out the majority of its trade with the European Union, Scotland does the same with the rest of Britain.

“It really would not be surprising to see the SNP do well,” Buckley added. “The UK made up 16% of EU GDP when it left, yet the pain was mostly felt by GBP, not EUR. The same could be said for the Scottish question.”

“But it is unlikely to be a repeat of the four agonising years of the “will they, won’t they?” 2016-20 Brexit period for the pound.”

“Instead, it will be mostly Scottish assets that are affected by the wave of uncertainty, with many questions raised as to what this will mean for Scotland’s economy, terms of trade, currency and interest rates,” he said.

READ MORE: Nicola Sturgeon should focus on COVID rather than Scottish independence, says Boris Johnson

Boris Johnson has been clear that he is not allowing another referendum in this parliament. If Westminster decides to reject the call for a referendum, it could go to the courts to see if Holyrood needs Westminster’s permission.

Due to this analysts believe that any referendum probably would not be this year but sometime in 2022 or 2023.

“It is the uncertainty this represents that presents a negative for sterling and, to a lesser degree, equities.” Stuart Cole, head macro economist at Equiti Capital, said.

“However, the recent performance of both sterling (cable back at 1.3950) and the FTSE (trading around the 7000 level again) suggests this risk is being downplayed by the markets at the moment, most likely attributable to the latest opinion polls showing support for Scottish independence is back below 50% and that the independence parties look set to fall short of securing a majority next week.”

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