Viewpoint - 18/09/2014

UK Monthly View September 2014

Uncertainty over the Scottish referendum may be impacting the economic recovery.

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The positive news regarding the economy, which include the recent upward revisions to the historical GDP figures, has been overshadowed by uncertainty generated by the forthcoming Scottish independence referendum. The prospect of a victory for the Yes campaign has pushed the pound to a 10 month low against the dollar and a range of commentators have speculated on the negative effects a break-up could have on the rest of the UK (rUK) and an independent Scotland. 

Yes or No – the potential fallout

It is difficult to accurately assess whether a yes vote would have a substantial economic impact for rUK beyond short term disruption and uncertainty. Discussions over matters like national debt and the currency used by an independent Scotland could have a destabilising effect from an international investor’s perspective and these look to be the main initial concern. However, the political risk to rUK from the vote, which could lead to a vote of no confidence in the Prime Minister and a diminished presence on the world stage is another factor to consider. 

While a much publicised recent YouGov poll showed a small lead for the Yes campaign, this looks to have galvanised the No campaign, who registered their first increase in the polls for a number of months in another more recent assessment of voters’ opinions. The odds are still in favour of a narrow victory for the No camp, but this remains an event that could have a substantial impact on the UK’s outlook over the next 12 months at least. 

Employment surging, wages lagging

Away from the Scottish referendum, the PMI for the construction and services sectors, increased to their highest level for 7 and 10 months respectively. Employment rose again, continuing the general direction of movement over the past two years and the unemployment rate fell, hitting 6.4% in Q2, the lowest since 2008. Wage growth remains weak, but with output continuing to grow we expect it to accelerate next year.

Developer confidence increasing

The PMI outturn for commercial property construction activity was steady in August at 61.8, only a touch lower than July’s 62.2. This suggests that developers continue to display a high degree of confidence in the prospects for occupier demand. Coupled with the easing in the availability of credit this should prompt an increase in speculative development, which is still at low levels outside London and parts of the South East. 

As is competition

The latest monthly numbers from IPD chronicling property performance show the market remains in rude health: in the 12 months to July 2014, all property total return was 18.5% - the highest level recorded since the autumn of 2011. This continues to be driven by inward yield compression as competition among investors, for not just prime assets, has intensified markedly over the course of the year.

Likely to invest?

Looking at the property impacts the independence referendum is having numerous reports have emerged of deals, both occupier and investor, being put on hold and independence clauses being put into contracts. Moreover, a survey by law firm Nabarro year showed of 239 real estate investors surveyed, not one respondent said they would be more likely to invest in an independent Scotland and 81% said they would be less likely to invest. We await the result with bated breath.


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