The RSM Brexit Stress Index rose slightly during a week that included conciliatory tones regarding proposals for a Northern Ireland economic zone, the High Court’s hearings over the suspension of Parliament and the Bank of England’s warning that continuing anxiety over Brexit and global trade disputes are taking their toll on the 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 from last week’s close at 1.22.
But despite its cautionary words, the Bank of England maintained the Base Rate at 0.75%. In announcing the unanimous decision, the central bank cited both the resiliency of the consumer sector and potential softening of the labor market. 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.
At the same time, the standoff over Brexit continued. The European Union had extended Britain’s deadline to depart from the bloc to Oct. 31, but seems reluctant to renegotiate terms of the withdrawal. Parliament has been working toward requiring Prime Minister Boris Johnson to seek an extension to the end of the year or beyond. This would argue for higher volatility and risk being priced into financial assets, and the prospect of further loss of potential output and profit.
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% of its value versus a weakened euro during the week on higher volatility. The pound also gained 0.5% against a basket of its trading partners, but remains 15% 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% 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%. 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, signaling a potential slowdown in growth.