The RSM Brexit Stress Index rose slightly last week despite conciliatory tones regarding proposals for a Northern Ireland economic zone and seemingly more open dialogue towards renegotiation from Brussels.
On the counter side, the index is still elevated, not least as a result of the Supreme Court’s hearings over the suspension of Parliament, the Bank of England’s warning about continuing anxiety over Brexit, the ongoing global trade disputes and the disruption to oil supplies from Saudi Arabia, all of which are taking their toll on the UK economy.
The composite index, which measures financial and economic stress surrounding Britain’s impending departure from the European Union, closed the week at 1.27 standard deviations above normal levels of stress, up slightly from the previous week’s close at 1.22 but down from the extreme high of 1.93 during the first week of September.
But despite its cautionary words, the Bank of England maintained the Base Rate at 0.75 per cent. In announcing the unanimous decision, the central bank cited both the resiliency of the consumer sector and potential softening of the labour market. It is arguable also that the Bank has also decided to keep rates as they are during the period when it does not yet know the direction of UK monetary policy that we will be following over the next few months.
Industrial production growth has now been negative for two consecutive months and employment growth has been slowing, with jobless claims continuing to rise. So although consumption remains robust because of rising wages, it’s not surprising that the recent decline in retail sales below its long-term average is viewed as a harbinger of household belt-tightening.
Commenting on the latest results, Simon Hart, Brexit lead partner at RSM said:
'With so many moving parts, it's not a great surprise that we've seen heightened levels of stress in the economy over recent weeks.
'Away from the daily political and legal drama, policymakers are now beginning to think very seriously about the economic stimuli that will be needed to support the economy in the event of a no deal Brexit. This would likely include a notable cut in interest rates, the return of QE, some significant tax incentives to help drive demand and support the most affected businesses through the worst and also tariff reduction on goods coming into the UK.
'But businesses should not be complacent or rely on this support. If they haven't already developed their contingency plans, they need to do so urgently. Too many UK middle-market businesses have done little or no Brexit contingency planning.'
Performance of index components
The RSM Brexit Stress Index is made up of six components; they include the British pound-euro exchange rate and its volatility, the FTSE 100 and its volatility, the gilt yield spread and the U.K. corporate bond spread.
This was the sixth week in a row that the pound has appreciated, regaining 0.6 per cent of its value versus a weakened euro during the week on higher volatility. The pound also gained 0.5 per cent against a basket of its trading partners, but remains 15 per cent lower in value since the 2015 general election and the start of the Brexit process. This will undoubtedly have an impact on the cost of living and future household consumption and growth.
The FTSE 100 gave back some of last week’s gains, ending the week just -0.3 per cent lower as volatility eased.
The bond market was more direct in its assessment of the threats to economic stability and growth. The yield on 10-year gilts declined in the run-up to and after the Bank of England’s rate decision, losing 14 basis points and ending the week at 0.63 per cent. The corporate market confirmed the potential disruption to growth and priced in a slight increase in risk. The 10-year/3-month yield curve is inverted by 15 basis points once again, signalling a potential slowdown in growth.