The RSM Brexit Stress Index declined to -0.08 from 0.41 the prior week due to the extension to Oct. 31 of the UK’s potential exit from the European Union. The index has made a two-standard-deviation move since early December, 2018; the trend implies broader financial conditions supportive of growth sorely needed in the UK economy, which has been stuck near a one-percent growth trend.
Inside the index, low volatility of euro-sterling and equity markets, as well as narrowing government and corporate spreads combined to send the index modestly below neutral at the week end. This is the fifth straight week of easing stress in financial markets and it is linked to the likely elimination of a so-called hard Brexit.
The trend implies broader financial conditions supportive of growth sorely needed in the UK economy, which has been stuck near a one-percent growth trend.
Forward-looking policymakers and investors are likely moving to price future improvements in financial conditions linked to the extension of the Article 50 deadline for Britain’s departure. If an agreement on a customs union is put in place, a ratification by public vote for any agreement or a second referendum results from the extension, then we expect to observe significant improvement in financial conditions that will bolster household spending, corporate outlays on capital expenditures and overall growth.
