Will the Boris bounce extend to the real economy?

Commenting on yesterday's FTSE250 record close, Simon Hart, RSM's Brexit lead partner said:

'The positive response from the markets to the Conservative Party winning an overall majority in Parliament has lifted the mood among investors and the financial markets generally, but it remains to be seen whether this can be sustained and if this new wave of optimism extends to the real economy. 

'The FTSE 250 – often seen as the bellwether of the domestic UK economy – reached a record high yesterday of almost 21,935 points before dropping back slightly to 21,920 at the close. Meanwhile, the FTSE100 also surged by 2.25 per cent, up 165.61 points to finish on 7,519. 

'The pound held on to its post-election gains yesterday, but has since fallen back against the euro and the dollar amid heightened fears of leaving without a deal at the end of the transition period. 

'Sterling may be in for a rocky ride as the money markets respond to events in the news cycle. But if we see the pound gain strength over the longer term, this raises the prospect of cheaper imports for consumers and businesses – and importantly the potential for lower fuel and food prices. Combined with the promise of tax cuts for some in the Budget and material regional investment, these factors could help give help give the economy a welcome new year boost.

'The latest reading from RSM's own Brexit Stress Index, which measures financial and economic risk surrounding Britain’s departure from the European Union, also dropped to an insignificant 0.01 standard deviations above normal stress levels at the back end of last week. The index tracks six components including the British pound-euro exchange rate and its volatility, the FTSE 100 and its volatility, the gilt yield spread and the UK corporate bond spread.

'However, it's worth remembering that some key measures have been stagnating for some time -  notably business investment in equipment and infrastructure. This decline in capital investment has been one of the casualties of the uncertainty which has hung over UK business for the last three years. If the UK is to make up lost ground, this trend will need to be reversed and UK productivity and efficiency compared to other advanced economies must improve. 

'While the Parliamentary deadlock may have lifted, the uncertainty for UK businesses hasn't. Our exit from the EU is now a near certainty on 31 January 2020, but the Prime Minister now has his work cut out to deliver a trade deal with the EU before the end of the transition period at the end of December 2020. 

'Given the exceptionally tight timetable, there is no guarantee that a deal will be done on time. This may necessitate a further request for an extension to the transition period - something which may not be politically palatable. Indeed we might see a multi-stage rollout of a UK-EU deal or perhaps even the EU requesting an extension as mooted by the new EU Commission’s President Ursula von der Leyen.

'While there is cause for cautious optimism, businesses shouldn't get too comfortable and they should keep their risk management plans under review. While the immediate response from the markets has provided a welcome boost, it may not provide the panacea that many are hoping for.'