Financial Conditions Index points to improving UK economic prospects says
Today RSM’s Financial Conditions Index signals business optimism as it turned positive for the first time since the global pandemic started in March 2020. Combining the positive financial conditions with Budget support set out by the Chancellor, RSM believes the conditions are right for longer-term growth of the UK economy.
The firm’s Index, an aggregated performance indicator of currency, bond and equity markets, has increased, from -0.1 below normal stress levels in Q3 2020, to a positive reading of 0.3 today.
The climb has been bumpy, reflecting the nervousness fuelled by the UK lockdown restrictions since Q3 and the fallout of Brexit. Nonetheless it seems progress with the vaccine rollout, liquidity in the market and the future prospects for an ‘investment-led recovery’ detailed in the Budget 2021, shows encouraging signs of positivity in the market in Q4.
Joe Brusuelas, chief economist at RSM, comments: ‘While all credit must be given to the medical and life sciences communities for the response to deliver three workable vaccines to address the pandemic; global monetary and fiscal authorities have also been busy laying the groundwork for a recovery from the pandemic-induced economic downturn. With the introduction of the latest Budget statement, we anticipate that financial conditions are conducive to growth of the UK economy with rates at or above 4 per cent this year.
‘Our financial conditions index is an indicator of the risk and perceptions of economic growth. The fact that it’s moved above zero should be a sign that the worst is behind us in terms of damage to the economy. But more importantly, the positive financial conditions reflect a recognition of the unbelievable work done by the scientists and our healthcare providers.
Simon Hart, lead International partner at RSM UK, said: ‘The extension of business support including the furlough scheme and the eligibility of 600,000 individuals that previously were not qualified to receive the Covid related support, including those that become self-employed after the 2019-2020 tax year, will prevent some long-term economic scarring in the jobs market caused by the pandemic. While, the introduction of the Infrastructure bank, 8 UK Freeports and a focus on the green agenda will unlock growth potential in key regions and bolstered UK trade and investment. The ongoing fiscal response does suggest we’re ‘going very long’ to use The Chancellor’s language, in terms of the evolution of the economy and UK business.’
Joe Brusuelas added: ‘However, spending plans in this weeks’ Budget reinforces the need for the Bank of England to keep a lid on long-term interest rates. There are unavoidable pandemic expenses ahead; and a need for direct support for businesses and individuals and investment in advanced industries will allow the economy to compete in the global supply chain.’