Financial conditions in the UK are signaling an improved environment for economic growth.
While the economy has weathered several external shocks in the past few years, there is room for improvement in the growth equation that is linked to the upcoming budget proposal from Chancellor of the Exchequer Rachel Reeves.
The RSM UK Financial Conditions Index stands at 1.4 standard deviations above neutral, which is providing a strong tailwind behind domestic economic activity.
In our estimation, financial conditions have been inflated by the speculative behavior of investors conditioned by the historically low interest rates of the previous decade and the outperformance of tech-related industries.
Fixed-income markets are operating at normal levels of risk, with returns in the gilt and corporate bond markets attractive compared with other developed economies.
Get Joe Brusuelas’s Market Minute economic commentary every morning. Subscribe now.
The pound remains weaker compared with its pre-Brexit norms but will most likely benefit from elevated interest rates and from increased confidence in the political framework.
The RSM measure of UK financial conditions is at its highest level since the pre-Brexit days of 2014 and, more recently, the 2021 post-pandemic recovery.
Financial conditions at these levels are indicative of low levels of risk priced into financial securities, increasing the potential for investment in the economy and setting the stage for growth.
