A historical relationship exists between UK GDP growth and a measure of financial stress in the UK. The financial stress variable pools information from the volatility of the exchange rate, the volatility of the equity market, the volatility of the bond market and the risk premium that investors demand to hold UK corporate bonds rather than the less risky UK government bonds. Monthly data over the 1970-2019 period suggests that the correlation between UK GDP growth in period t+3 and UK financial stress in period t is equal to -0.33. What can we infer from this correlation?

A historical relationship exists between UK GDP growth and a measure of financial stress in the UK. The financial stress variable pools information from the volatility of the exchange rate, the volatility of the equity market, the volatility of the bond market and the risk premium that investors demand to hold UK corporate bonds rather than the less risky UK government bonds. Monthly data over the 1970-2019 period suggests that the correlation between UK GDP growth in period t+3 and UK financial stress in period t is equal to -0.33. What can we infer from this correlation?

There is statistical evidence that a rise in financial stress signals a slowdown in UK growth three months later.

It is more likely than not that an improvement in UK growth will result in higher financial stress.

There is statistical evidence that a rise in financial stress signals an improvement in UK growth three months later.

It is more likely than not that the Bank of England will pursue expansionary fiscal policy in order to stave off the future recession signaled by the rise in financial stress.

The Bank of England will raise its policy rate in order to stave off future recessions.