Markets spooked by threat of Labour-SNP coalition economists

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Wednesday 08 April 2015

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Markets spooked by threat of Labour-SNP coalition, economists warn

Fears that a deal between Ed Miliband and Nicola Sturgeon could reignite the
Scottish independence question have kept the pound weak

Nicola Sturgeon (left), leader of the Scottish National Party, and Labour leader Ed Miliband Photo: Andrew Milligan/PA Wire and Ben Stansall/AFP

By
Peter Spence, Economics Correspondent

7:59PM BST 07 Apr 2015

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The prospect of a coalition being formed between Labour and the Scottish National Party after May’s election has frightened financial markets, economists have warned. Worries that a deal could be struck between Ed Miliband and Nicola Sturgeon have suppressed the pound and British markets, reflecting concerns that they may undo much of the Coalition’s progress, according to Panmure Gordon. Simon French, an economist at the stockbroker and investment firm, said international investors especially could be made nervous by a change of direction, and worried that a Labour government could undo what has been achieved by the Conservative-led coalition over the past five years. He said that fears of a Labour-SNP tie-up remained a “key risk on most of our clients’ radars”. Panmure Gordon has more than 100 UK-listed corporate clients and over 400 institutional clients. Such a left-wing deal could reignite concerns over a break-up of the United Kingdom, with the SNP likely granted “significant fiscal transfers” from the rest of the country towards Scotland, said Mr French. His warning followed Swiss bank Credit Suisse claims that a Labour-SNP government would be the worst possible outcome for UK bond markets. The lack of a clear government and more power to a fringe party such as SNP would be met with a negative reaction by the financial markets, it warned. Such a coalition would be “markedly looser” in its approach to government purse strings, the Swiss bank said, potentially forcing the Bank of England to raise its interest rates faster in an attempt to prevent the economy overheating. “A lot of what has been implemented in the last five years will be up for question,” Mr French said, pointing to the Coalition’s corporation tax cuts and changes to income tax threshold as areas that may be overhauled by Mr Miliband. Uncertainty going into the election is likely to keep sterling weaker ahead of polls, Panmure analysis found, drawing comparison with the Scottish independence vote and 2010 general election. An SNP deal with Labour could erode the larger party’s prospects in England and Wales at future elections, accounting for 88pc of UK constituencies. Mr French said it was more likely that SNP will play a role after May as a “Westminster party of opposition rather than of government”. Panmure believes “there is a high chance” that the pound will remain lower than its medium term value in the coming weeks. It will then rebound after the formation of government led by the Conservatives as a minority party, the bank predicted. While the risk of a Labour-SNP coalition cannot be entirely dismissed, the risks from a victory may have been eroded. In the past 20 to 30 years the UK has shifted from being a “price maker” to a “price taker” on the global stage, Mr French said. He continued: “If you look at the record of this government on immigration, on the rate we pay on our national debt, you would struggle to say that those two trends were influenced or can be influenced by domestic politicians.” Politicians will have to face that globalisation has meant that an increasing number of markets are beyond their control. “It will be decisions made in Beijing, Berlin and Washington as much as in London that will impact UK growth” going forward, he added.

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