The UK economy is ready for battle. With the fastest growth among Group of Seven nations, Britain may have built up enough momentum to weather the possible loss of Scotland in today’s referendum, or to keep strengthening if the union survives. The economy has expanded for six straight quarters, payrolls are at a record high and authorities have forced the biggest banks to build capital reserves to steel themselves against shocks.
The UK has come a long way since 2007, when record debt and unfocused bank oversight sowed the seeds of the financial crisis. Bank of England Governor Mark Carney is keeping interest rates at a record low amid weak wage growth to ensure the recovery is beyond doubt, and can also maintain that policy stance for longer if uncertainty after a “yes” vote weighs on the economy.
“There’s a fair bit of resilience, you only have to look at how well the economy’s performed all through last year and the start of this year while our biggest trading partner, Europe, was in recession,” said Azad Zangana, an economist at Schroder Investment Management Ltd in London. A split probably wouldn’t mean a major impact, “but there would still be a noticeable hit to business and consumer confidence.”
As both sides pushed their arguments in the final day of campaigning yesterday, the latest polls showed the race too close to call. Voting began at 7 am local time and polling stations close at 10 p.m.
The Organisation for Economic Cooperation and Development forecast this week that the UK will grow 3,1 percent this year.
That would be the fastest among the world’s largest economies after China and compares with a 2,1 percent projection for the US GDP has returned to its pre-crisis levels, and the labour market is on the mend, giving a boost to consumer sentiment that’s helping entrench the revival from the deepest recession since World War II.
Data this week showed unemployment dropped to a six-year low in the quarter to July. Retail sales rose in August and have now posted annual growth for 17 straight months. At the same time, the central bank has taken a tough stance on banks since it gained unprecedented oversight powers last year. It forced Britain’s five largest lenders to plug a 13,4 billion-pound capital shortfall to withstand possible losses and this year put a limit on riskier mortgages.
Carney says regulators may produce this year a framework to shield taxpayers from the collapse of a global financial institution. That wasn’t the case when Lehman Brothers Holdings Inc went bust in 2008 and triggered an economic meltdown; nor did the BOE have the tools to respond to the liquidity squeeze that led to a run on Northern Rock Plc in 2007.
That’s not to say the dissolution of the 307-year-old union would be plain sailing. During the proposed 18 months of negotiations to effect a divorce, wrangling between the governments in Edinburgh and London could have a destabilising influence on households and businesses, weaken the pound and push up sovereign borrowing costs. Sterling has fallen 1,8 percent against the dollar this month. It traded at $1,6308 as of 11:30 am London time, up 0,2 percent from yesterday.
As well as how to divide the UK’s debt and its oil and gas reserves, at issue in the event of a split would be what currency Scotland uses, the potential relocation of banks and who provides a backstop to the financial sector. — Bloomberg.