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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Bank of England raises growth forecasts; FTSE 100 hits 14-month high – as it happened

A view of the Royal Exchange and Bank of England in London.
A view of the Royal Exchange and Bank of England in London. Photograph: Vuk Valcic/SOPA Images/REX/Shutterstock

Full story: UK on track for best year since 1941

And finally... here’s Richard Partington’s updated news story on the Bank of England’s forecasts:

UK set for strongest economic growth since WWII, forecasts Bank of England

Britain is on track for the strongest growth since the second world war this year as it stages a faster-than-expected recovery from the Covid-19 pandemic, according to the Bank of England.

The Bank raised its estimate for UK GDP growth to 7.25% in 2021, up from a previous forecast in February for growth of 5% this year, as rapid progress with the Covid-19 vaccine and easing of restrictions paves the way for a boom in pent-up demand.

The growth rate would be the fastest since an 8.7% expansion in 1941, when production was being pushed to the limit during the second world war. However, it follows a collapse of almost 10% in 2020, the worst decline for more than three centuries.

Setting out upbeat forecasts for growth and jobs as the economy reopens, the central bank’s rate-setting monetary policy committee (MPC) voted unanimously to keep interest rates on hold at record-low level of 0.1%.

Andrew Bailey, the Bank’s governor, said there was “very strong, good news” from the economy as lockdown measures are relaxed. However, he warned two years of GDP growth had been lost to the global health emergency, and said there were still risks on the horizon – including high rates of coronavirus in India and some other countries.

“Let’s not get carried away. It takes us back by the end of this year to the level of output we had essentially at the end of 2019 pre-Covid. So that is good news in the context of where we’ve been, but it still means that two years of output growth have been lost to date,” he said.

“So I would give this a balanced message: there is good news, clearly very good news given what we’ve been through. But let’s put it into perspective.”

Reflecting the pace of the recovery, the Bank said it expected the UK economy to recover to its pre-pandemic level by late 2021 and that unemployment would hit a much lower peak than previously forecast.

Supported by the extension of furlough until the end of September, Threadneedle Street said it estimated the jobless rate would peak at just under 5.5% in the autumn....

Here’s the full story:

And here’s an emoji-filled summary :)

Goodnight. GW

Updated

Here’s a curious thing... Warren Buffett’s Berkshire Hathaway stock price is so high, the Nasdaq can’t cope.

Berkshire Hathaway’s Class A stock has hit a fresh record high today, trading at a stratospheric $432,400 each.

That, rather fabulously, is more than certain market operators such as Nasdaq can handle. That’s because they use a computer format using 32 bits (binary, so either 1 or 0).

The WSJ explains:

The biggest number possible is two to the 32nd power minus one, or 4,294,967,295. Stock prices are frequently stored using four decimal places, so the highest possible price is $429,496.7295.

The best thing about this story is that Buffett has always refused to allow the A shares to split - which is what normally happens when a stock’s value climbs to levels that put it outside a small investor’s pocket.

The logic, as Investopedia explains here, is that the Sage of Omaha wanted to attract long-term investors, rather than speculators who would pile in and out of a ‘cheaper’ share (although they can still trade B class shares, at a more affordable $286 today).

But this isn’t actually stopping the A shares trading in New York - as you can see on CNBC here. They’re also trading on my Reuters terminal:

Berkshire Hathaway’s share price
Berkshire Hathaway’s share price today Photograph: Refinitiv

The London stock market were lifted by relief that the Bank of England wasn’t rushing to tighten policy, despite the improving economy.

So says Danni Hewson, financial analyst at AJ Bell:

“You could almost hear the exhale as the Bank of England announced it was making no changes to its current policies despite a brightening economic picture. The relief turned into exuberance and a late flurry catapulted the FTSE 100 to a 14-month high.

Anticipation is so thick it’s almost palpable, but sometimes gratification is delayed. Take the UK’s travel sector which had to cool its jets for another day before it gets long awaited clarity on government plans for summer holidays.

“Over on Wall Street vaccine makers pulled down the Nasdaq and S&P 500 reacting to President Biden’s stance on intellectual property waivers; only London based AstraZeneca seemed to escape unscathed. Even Moderna stocks slumped despite the company reporting its first ever profitable quarter and raising its vaccine sales forecast. Recovery comes with hidden costs but making sure that recovery is truly global has in this case outweighed other considerations. And the slump was short-lived, chased off by another fall in US jobless claims which propelled the Dow to a record of its own.”

Pharmaceuticals firms are not joining today’s rally.

Pfizer, Moderna and BionTech have all dropped today, after the US government threw its weight behind global plans for a patent waiver on Covid-19 vaccines - to help get more produced quickly.

Here’s the details:

Analysis: V-shaped recession forecast is good news but....

Our economics editor Larry Elliott has dipped into the history books, to put today’s growth forecasts into context:

If the Bank of England is right, Britain is on course for its strongest annual growth since 1941 – the year of Pearl Harbor and Hitler’s invasion of Russia, our economics editor

The latest forecasts from Threadneedle Street are stronger in every respect than those it came up with three months ago: the hit to growth during the first-quarter lockdown has been less severe, the bounce back will be more rapid, and the peak in unemployment will be significantly lower.

This represents a classic V-shaped recession – a deep plunge in output followed by a fast recovery. It took half a decade for national output to regain its pre-crisis peak after the financial crash of 2008, but this time it will do so in less than two years. That, as the Bank’s governor, Andrew Bailey, pointed out is “very good news” because it means fewer people lose their jobs and fewer businesses go bust...

But that doesn’t mean the UK is in the sunlit uplands, as Larry explains here:

America’s Dow Jones industrial average has also rallied, hitting a new record high.

The Dow traded as high as 34,435 points, and is currently up 0.5% or 163 points at 34,394 points.

The fall in jobless claims may have boosted hopes of a recovery, as traders set aside their worries that the recovery could drive up inflation and force interest rates to rise sooner than expected.

FTSE 100 closes at new 14-month high

Britain’s blue-chip FTSE 100 index has just closed at a fresh 14-month high, as economic recovery hopes build.

The Footsie ended the day 37 points higher at 7076 points, up 0.5% today.

That’s its highest close since the last week of February 2020, during the early stages of the market crash caused by the first wave of Covid-19.

The FTSE 100 index over the last two years
The FTSE 100 index over the last two years Photograph: Refinitiv

It means the FTSE 100 has gained over 9% so far this year (although it’s still below its record high above 7,903 points set back in May 2018).

Nearly every sector rose today, led by utilities, consumer non-cyclicals, real estate firms, energy and miners.

The weaker pound will have given multinationals a small lift, as it makes their overseas earnings more valuable in sterling terms.

Silver miner Fresnillo (+6.2%) topped the risers, followed by tobacco firms BAT (+3.2%) and Imperial (+3%).

Other risers included commercial property firm Land Securities (+2.3%), financial services company Legal & General (+2.7%), and luxury fashion maker Burberry (+2.1%).

The smaller, more UK-focused FTSE 250 index also rallied, gaining 0.5%. It was partly lifted by the possible takeover of John Laing; its shares surged 19.5% by the close to the highest since January 2020.

However, technology shares have remained under pressure, with online grocer Ocado falling 3% and electricals e-commerce firm AO World down 3.3%.

Michael Hewson of CMC Markets says:

After a solid rebound yesterday, European stocks have been slightly more subdued today, and somewhat mixed, with tech shares acting as the main drag, although any weakness has been much more modest than was the case on Tuesday.

The FTSE100 is looking a little more solid, hitting a new 14-month high, while the FTSE250 is also looking good, helped by the more defensive elements of the index, and a slightly weaker pound.

The Bank of England’s more upbeat forecasts clearly haven’t worried City investors today -- as Sandra Holdsworth, Head of Rates UK at Aegon Asset Management, explains:

It was a much more upbeat report than in previous meetings. GDP was upgraded and one of the members, Andy Haldane voted for curtailing asset purchases by August of this year reducing the target for gilt purchases by £ 50bn. However policy was maintained at current levels . Bank rate remains at 0.1% and the asset purchase programme was also maintained at £895bn . The weekly pace of gilts to be purchased was reduced to £3.4bn per week although the Bank of England was at pains to stress that this is purely operational rather than a change in policy .

“As well as revising up economic growth forecasts , the Bank of England also revised up the ability of the economy to add new capacity thus meaning that the higher GDP forecasts didn’t lead to higher inflation rates . Inflation is expected to rise in the short term because of base effects but return to target levels over the forecast period. With this benign outlook for inflation the Bank appeared to be in no hurry to start thinking about higher interest rates.”

US jobless claims fall to pandemic low

America’s economy is also strengthening, as Covid-19 vaccinations allow firms to reopen.

The number of people filing new jobless claims dropped to a fresh pandemic low last week, at 498,000. That’s the lowest since the first wave of Covid-19 hit the US economy in March 2020.

Robert Frick, corporate economist at Navy Federal Credit Union, says it shows the US labor market is improving -- and could herald a strong American jobs report on Friday.

“The great gains in jobs continued, with weekly state claims falling below 500,000 for the first time since the economy crashed a year ago. More good employment news is expected tomorrow, when the April jobs report should show about 1 million jobs added last month.

While forecasts put a return to pre-pandemic employment two years off, job gains are cutting financial stress and poverty by leaps and bounds now, and this strong trend should continue at least through the summer.”

John Laing in takeover offer talks

Back in the markets, news of a possible takeover offer for infrastructure investor John Laing have sent its shares soaring 17%.

John Laing develops greenfield infrastructure projects - typically in Public Private Partnerships. That includes building courts, hospitals, high-speed trains, roads, bridges, and renewable energy systems such as biomass plants, onshore wind farms and solar PV.

John Laing told the City that it was in talks with private equity firm KKR, although there’s no certainty of an offer. KKR has until 5pm on 3rd June to make a bid, or walk away.

Share in John Laing, which had been rising already today, promptly jumped sharply higher. They’re trading at 371p now in late trading (a level not seen since late May 2020).

John Laing’s share price over the last two years
John Laing’s share price over the last two years Photograph: Refinitiv

John Laing was founded in 1848 as a building company in Carlisle. It listed on the stock exchange in 1953, but was taken private in 2006, only to float again nine years later.

As we wrote back in 2015:

After working on projects such as the M1 motorway and the Sizewell B nuclear power station, it increasingly focused on infrastructure work and in 2001 decided to concentrate solely on such projects.

Pound dips

Back in the markets, the pound has slipped lower despite the Bank’s upgraded growth forecasts, and its decision to slow the speed (but not the size) of its bond-buying programme.

Sterling is now down 0.3% against the US dollar at $1.387.

Against the euro, it’s down 0.65% at €1.151.

It was a volatile session - after a sudden jolt at noon, the pound then hit a one-week high against the dollar, before subsiding as traders digested the report.

The pound vs the US dollar today
The pound vs the US dollar today Photograph: Refinitiv

Neil Wilson of Markets.com says it was a ‘whipsaw’ move., adding:

Looks as though the slowing of bond purchases to a weekly rate of £3.4bn from £4.4bn amounts to a taper, but it appears to be not much more than the kind of technical taper that had already been flagged in February.

Although the Bank insists this is an ‘operational decision’, it does show some confidence in the economic recovery, Wilson adds - otherwise the Bank could have kept buying £4.4bn of bonds each week, and pledged to do more QE if needed.

BoE governor: Only buy crypto if you're prepared to lose all your money

The press conference ended with Andrew Bailey warning that crypto assets are risky and have ‘no intrinsic value’.

Q: Some people say that bubbles are forming in financial markets, with people ploughing money into all sorts of crazy things. What does cryptocurrencies say about the state of financial markets? Have you any concerns about the impact of ultraloose policies on markets?

Governor Andrew Bailey says the Bank watches the markets very carefully. There have been a number of developments in the last few months.

On their own, they’re not a financial stability risk, but the Bank’s Financial Policy Committee will look very carefully at the overall picture as it draws up the next Financial Stability Report, Bailey explains.

And on crypto - he insists that they are assets, not currencies.

Bailey repeats a point he’s made a few times in recent years -- only buy them if you’re prepared to lose all your money.

As Bailey puts it:

I’m afraid they have no intrinsic value. Now, that doesn’t mean to say people don’t put value on them, because they can have extrinsic value. But they have no intrinsic value.

I’m going to say this very bluntly again.

Buy them, only if you’re prepared to lose all your money.

Q: Which sectors are going to benefit from this recovery?

Deputy governor Ben Broadbent predicts that sectors who saw the weakest growth in lockdown should see the strongest growth coming out.

(He doesn’t specify which, but clearly it would include hospitality and leisure).

Q: Why has the Bank of England doubled its estimate for how much of their excess savings households will spend, from 5% to 10%?

Andrew Bailey says the Bank has benefitted from recent survey data since its last forecasts in February, which suggests that 5% was an underestimate.

This is a very unusual situation, the governor explains.

There has been very big build up in unanticipated savings under the lockdown. But it isn’t evenly distributed - it’s concentrated among those whose incomes have been supported, and those who have had “much reduced” chances to spend.

As Bailey puts it:

It is concentrated in the better off and the elderly, particularly.

Bailey adds that the Bank was cautious about its forecasts about how these rising savings would affect the “marginal propensity” to spend [this is typically lower for people on higher incomes, research shows]

Q: Do your forecasts include the possibility of another rise in Covid-19 cases?

Governor Bailey says the Bank is ‘enormously grateful’ to Chris Whitty, the UK Chief Medical Officer, who has met with the MPC for an hour before each forecast round, to answer their questions on the pandemic.

Whitty has cautioned us that yes, there is a risk of a new strain of Covid emerging, Bailey says, and that’s factored into the Bank’s forecasts.

In terms of timing, Bailey wouldn’t put too much emphasis on the possibility of a summer surge, saying forecasts of a summer pickup have a very large confidence band (meaning there’s a lot of uncertainty about the projection).

There’s also an argument that Covid has a seasonal pattern, he continues (so any new strain might be more likely to come in the winter).

So that’s one reason the Bank’s current forecasts have a relatively large short-term downside risk, Bailey concludes, because there is the possibility that the UK could get a variant, so the question would then be how much protection existing vaccines give.

Extending the furlough scheme until September, rather than ending it in April, will have a big impact on unemployment this year, the BoE explains.

Deputy governor Ben Broadbent says that the furlough scheme effectively removes the supply of labour, as the pandemic removes demand.

So now, more people should go back into work as lockdown ends, which is why the Bank thinks unemployment will peak below 5.5%, not around 7.75%.

“Essentially what’s happened in this forecast relative to February is that more of the people who were on furlough and who might have been eventually employed but only after a period of unemployment, more of those people were able to go directly back into employment.

And that’s why you get such a big difference in the unemployment profile.”

Another historical question....

Q: It looks like this recession will be much less severe with much less scarring than the one after the 2008 financial crisis. Why?

Andrew Bailey says research shows that recessions linked to financial crises tend to be more severe and have a longer-lasting impact.

We have not had a financial crisis this time - the reforms introduced after the last crisis have stood the test, Bailey replies.

There was a lot of debate last summer about the prospect of a V-shaped recovery -- and some criticism that the Bank was too optimistic, Bailey says.

But today, the ‘basic mechanics’ of that shape of recovery remain reasonably strong, partly on the back of a “hugely successful vaccination programme”, Bailey adds -- although a year ago, the return of Covid (causing the current lockdown) wasn’t expected.

Bailey: Not seen a bounceback like this in modern times

Q: Are their any historical comparisons for this year’s bounceback, such as the roaring 20s?

Andrew Bailey says the UK hasn’t seen a bounceback quite of this nature in modern times.

The strong growth recorded in 1941 was heavily influenced by wartime conditions, he points out, explaining:

I don’t think we’ve had a bounce back quite of this nature, certainly in modern times.

We possibly saw some of those effects during the Industrial Revolution, Bailey continues (he did his PhD on this period).

There were one or two quite strong numbers in the 1870s.

But the important point is that this is a bounceback from 2020, Bailey adds.

In a way, thank goodness.

Let’s remember, this time last year when we were having this session, we were talking about the largest fall in GDP possibly since the early part of the 18th Century...1709.

[1709 was the year of the Great Frost]

Q: Your forecasts predict there will be excess demand by the end of 2021. People will worry about this causing inflation, but you say it is temporary. How will you judge if you’re right?

Governor Bailey explains that there are a lot of uncertainties, beyond the pandemic itself.

There are very big questions about the path of supply and demand, and the structure of the economy, depending how many of the changes in spending and working patterns remain, and which do not. So the Bank will watch it very carefully.

Governor Bailey: Growth forecast is very good news, but still means two lost years

Q: Is the 7.25% growth expected this year simply a natural arithmetic rebound from last year’s 10% slump, or is it more of a self-sustaining, stable recovery?

Governor Andrew Bailey says it’s important to put today’s forecast of a faster recovery into proper context.

Given the UK had such a large fall in output last year, it is good news that we’re getting a recovery this year, he explains.

There is very strong and good news in the state of the economy at the moment, as represented in the forecast in the report.

However, “let’s not get carried away”, he adds. It takes the UK back, by the end of this year, to the level of output at the end of 2019, pre-Covid.

That is good news in the context of where we’ve been.

But another way of expressing that is that two years of output growth have been lost to date.

Updated

On Brexit, Bailey says that the early evidence is that many firms are adjusting to the new trade arrangements between the UK and the EU.

“It remains too early to judge whether the effects, both in terms of the short-term disruption and the longer-term effects on supply growth are in line with the assumptions underlying the MPC’s forecasts.

“The MPC has retained its assumption that trade and activity will be lower in the first half of this year as firms adjust to the introduction of new trading arrangements. These additional effects on trade are assumed to dissipate by the end of this quarter.”

Governor Bailey also confirms that the Bank is slowing the pace of its QE bond-buying scheme, but the overall size of the package remains unchanged (at £895bn).

Bank of England governor Andrew Bailey is holding a press conference now to explain today’s Monetary Policy Report.

He explains the impact of the latest restrictions have been smaller than anticipated this year, which is why the Bank expects a smaller contraction in Q1 (around 1.5%), and a recovery to pre-crisis levels by the end of the year.

These projections are conditioned on Covid restrictions in the UK being eased in the near term, with most lifted by the end of Q2.

Demand will also be supported by households running down around 10% of the savings built up in the lockdown -- higher than expected three months ago.

Bailey warns that there are risks to its forecasts - including the possibility of renewed waves of infections in the UK and other countries.

On balance, the MPC judges the risks to its GDP forecast are skewed to the downside in the first year of the forecast, but ‘broadly balanced’ further out.

Bailey also explains that extending the furlough scheme will limit the rise in unemployment this year, with most workers on furlough expected to return to work later this year as the scheme ends (as flagged earlier).

Bank predicts faster growth: What the experts say

The Bank’s upgraded growth forecasts reflect how the economic outlook has improved since February, say experts.

Charles Hepworth, investment director at GAM Investments, says it’s a ‘big upgrade’

On the back of recent central bank action across the world, the Bank of England followed the narrative of holding interest rates at record lows of 0.1% and continuation of its asset purchase plan at £875bn. There was one dissenter in the ranks with Andy Haldene voting for a tapering of the purchases by £50bn. He does leave the committee after the next meeting so it may be a last sole voice but it could hint to a shifting view that could potentially be building within the committee that the recovery we are now firmly in warrants perhaps less stimulation.

They raised the UK growth forecast for this year to 7.25% vs 5% previously, so a big upgrade and reflective of the bounce in real recent data and this means the economy returns to pre-pandemic levels over this year. They still view inflation as only being transiently higher, a now common central bank mantra, but either way the growth outlook following the rapid vaccination roll-out is flying to the upside and this can only build in inflationary pressures over the longer term.

Silvia Dall’Angelo, senior economist at the International Business of Federated Hermes, says the latest stimulus measures are supporting growth:

“Updated forecasts included a range of upward revisions concerning economic activity and the labour market, which reflected positive developments since the February forecasting round.

Most notably, domestically, the March Budget provided fresh fiscal stimulus, while the vaccine rollout has made further significant progress.

Accordingly, the Bank of England now expects UK GDP to go back to its pre-crisis level by the end of this year, a quarter earlier compared to its February forecasts. In addition, following the extension of the furlough scheme, the unemployment rate is expected to peak lower at 5.4% in Q3 of this year, rather than close to 8% as per February’s forecasts.

Dean Turner, Economist at UBS Global Wealth Management, predicts that interest rates will still remain low for some time, though:

“Markets were eagerly awaiting to see if the Bank of England would lean further towards the hawkish end of the central bank spectrum, and those who expected this to be revealed today were not disappointed. The Bank’s decision to slow the pace of purchases was inevitable at some point and doing so now means there will be less of cliff edge later in the year.

The upgrades to the growth outlook were also widely expected considering the recent Budget, but the message is still one of caution. The Bank said that clear evidence that progress is being made will be needed before they consider their next policy move. In our view, this points to the Bank keeping base rates unchanged for some time yet. This low interest rate environment will support equity markets as the UK and global economy continues to recover.

Full story: UK set for strongest economic growth since WWII, forecasts Bank of England

Britain is on track for the strongest growth since the second world war this year as it stages a faster than expected recovery from the Covid-19 pandemic, according to the Bank of England.

The Bank raised its estimate for UK GDP growth to 7.25% in 2021, up from a previous forecast in February for growth of 5% this year, as rapid progress with the Covid-19 vaccine rollout and easing of restrictions fuels a boom in pent-up demand.

Reflecting the pace of the recovery, the Bank said it expected GDP to return to pre-pandemic levels over the course of this year. Threadneedle Street’s rate-setting monetary policy committee (MPC) also voted unanimously to keep interest rates on hold at record-low level of 0.1%.

The central bank said it would slow its bond-buying to £3.4bn a week between May and August, down from its current pace of £4.4bn.

The MPC said:

“The expected completion point of the purchase programme remained unchanged. This operational decision should not be interpreted as a change in the stance of monetary policy.”

The Bank of England is predicting that the UK will see the strongest growth since the second world war this year, with a 7.25% increase in GDP.

That follows the worst downturn in centuries, with GDP falling 9.8% in 2020.

It’s a relatively bullish forecast, too. Last month, a round-up of City forecasts from the Treasury showed an average forecast for UK growth in 2021 of 5.7%, while the EY Item Club predicted 6.8% growth.

Bank of England cuts unemployment forecast

The Bank of England has also cut its unemployment forecast, following the government’s extension of the furlough scheme in March’s budget.

It now expects the unemployment rate will peak at just below 5.5% in the third quarter of this year, down from around 7.75% it expected back in February.

This downward revision “largely reflects” the extension of the Coronavirus Job Retention Scheme and the Self-Employment Income Support Scheme in the Budget, the Bank says.

The furlough scheme, alongside a projected recovery in activity and demand for labour, is expected to support employment. Job vacancies – an indicator of labour demand – had already begun to pick up during Q1.

However, unemployment is nevertheless expected to rise as more people start to search for jobs as social distancing measures ease, and so some of the fall in labour market participation unwinds.

This fan chart shows the latest forecasts for unemployment and inflation (darker areas are more likely).

Bank of England unemployment and inflation forecasts, May 2021

The Bank of England’s monetary policy report

On inflation, the Bank of England predicts the consumer prices index will rise temporarily above its 2% target towards the end of 2021, largely driven by energy prices and rising raw material costs.

It then sees inflation returning to around 2% in the medium term.

Today’s Monetary Policy Report forecasts that:

As previous falls in fuel and utility prices drop out of the annual calculation, and more recent rises in energy prices feed through to household bills, inflation rises.

There is also some upward near‑term price pressure from recent increases in other input costs, for example higher freight and raw material prices. Inflation is projected to peak in 2021 Q4 at around 2½%.

Bank of England lifts growth forecasts

The Bank of England has lifted its growth forecasts for the UK, saying the economy looks stronger than expected back in February.

In 2021, annual average GDP growth is projected to be around 7¼%, compared with around 5% in the February Report.

It now predicts the economy shrank by less than expected in the first three month of this year, during the lockdown, followed by a sharp recovery in April-June.

And it also predicts the economy will recover to pre- Covid levels in the fourth quarter of 2021, as pandemic restrictions are lifted.

Its new forecasts predict that UK GDP “recovers materially as Covid-related restrictions are eased”.

Overall, GDP is projected to rise materially over 2021, and to exceed its 2019 Q4 level in 2021 Q4.

Here’s the details:

UK GDP is expected to have fallen by around 1½% in 2021 Q1, less weak than was assumed in the February Report.

New Covid cases in the United Kingdom have continued to fall, the vaccination programme is proceeding apace, and restrictions on economic activity are easing.

Reflecting these developments, GDP is expected to rise sharply in 2021 Q2, although activity in that quarter is likely to remain on average around 5% below its level in 2019 Q4.

GDP is expected to recover strongly to pre-Covid levels over the remainder of this year in the absence of most restrictions on domestic economic activity. Demand growth is further boosted by a decline in health risks and a fall in uncertainty, as well as announced fiscal and monetary stimulus.

Consumer spending is also supported by households running down over the next three years around 10% of their additional accumulated savings. After 2021, the pace of GDP growth is expected to slow as the boost from some of those factors wanes.

The level of activity is higher in each quarter of the forecast than in the February projections.

Updated

The Bank’s Monetary Policy committee has also voted 8-1 to keep its asset purchase programme at £895bn, including buying up to £875bn of government bonds.

But chief economist Andy Haldane (who is leaving to become chief executive of the Royal Society of Arts thinktank) wanted to lower the size of the programme.

The Bank says:

One member (Andrew Haldane) voted against this proposition, preferring to continue with the existing programme of UK government bond purchases but to reduce the target for the stock of these purchases from £875 billion to £825 billion.

But the Bank is slowing the pace of its bond-buying, as some economists had predicted might happen.

It says:

As envisaged since the announcement of the programme in November 2020 and consistent with developments in financial markets since then, the pace of these continuing purchases could now be slowed somewhat. The expected completion point of the purchase programme remained unchanged.

This operational decision should not be interpreted as a change in the stance of monetary policy.

Bank of England leaves interest rates unchanged

The Bank of England has voted unanimously to leave UK interest rates unchanged at their current record low of 0.1%.....

The pound is currently flat against the US dollar at $1.39, as we await the Bank of England’s interest rate decision.

Against the euro, it’s down around 0.3% at €1.154.

Sophie Griffiths, Market Analyst at OANDA, says tensions off the coast of Jersey could keep sterling in check.

The pound has barely moved despite impressive service-sector activity data. While on the one hand, the BoE could support further gains for sterling as the economic outlook improves. On the other, escalating Brexit tensions between France and the UK and the arrival of Navy patrol ships in Jersey could keep the lid on any BoE-inspired gains.

No change in policy is expected from Andrew Bailey & Co. However, an upward revision to the quarterly inflation report could be on the cards...

Simon French, chief economist at Panmure Gordon, makes some interesting points on the Bank of England’s Monetary Policy Report (due in just over 30 minutes).

Rio Tinto investors revolt over pay after Juukan Gorge destruction

Mining giant Rio Tinto has just been given a bruising bloody nose by investors over the lucrative exit package handed to former CEO Jean-Sebastien Jacques.

Jacques quit last year after the huge outcry over Rio’s destruction of the sacred 46,000-year-old rock shelter at Juukan Gorge to expand an iron ore mine.

And today, more than 60% of Rio shareholders have opposed last year’s Directors remuneration report, a major revolt by City standards, unhappy that the company hadn’t clawed back more of Jacques’ pay.

Jacques did lose bonuses worth around £2.7m after the Juukan Gorge destruction. But Institutional Shareholder Services, the influential proxy adviser, called for a deeper clawback, estimating that he still holds performance shares worth £27m.

Clearly many investors agreed with ISS that Rio should have used its powers to reduce the number of “performance shares” held by Jacques under a long-term incentive plan. Here are the details.

Updated

Back in the eurozone, retail sales jumped 2.7% in March, in another sign that its pandemic downturn is easing.

ING’s Bert Colijn says retail spending should keep rising as lockdowns are eased, helping economies recover.

This marks the second monthly increase in a row, indicating that January marked the second wave bottom in terms of retail sales. The recovery therefore already started over the course of the first quarter and we expect it to continue from here.

Among the larger countries, Germany and Netherlands showed the strongest improvements at 7.7 and 8.4% respectively, while France lagged with a -1% decline. This shows how important restrictions continue to be for the retail sector, dominating the growth profile.

Updated

UK economic recovery: what the experts say

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, predicts growth will accelerate in the coming months, following April’s jump:

“Service sector companies were creating jobs at a level last seen since in October 2015 and paying more in wages to get the best talent; a sign of ever-increasing confidence about the year ahead.

This chipper atmosphere was built on a solid foundation of the biggest rise in activity since October 2013 as firms enjoyed a deluge of new work following lockdown easing and improved economic conditions.

Brock warns, though, that stretched supply chains and rising inflation could weigh on growth.

Economist Julian Jessop says the recovery is gathering pace:

EY Club’s Howard Archer says the economy made a ‘robust’ start to the April-June quarter.

The jump in service sector activity last month helped to push total private sector growth to its highest in over seven years:

UK composite PMI
UK composite PMI Photograph: IHS Markit

Tim Moore, economics director at IHS Markit, says “a surge of pent up demand has started to flow through the UK economy” as pandemic restrictions lift.

The roadmap for reopening leisure, hospitality and other customer-facing activities resulted in a sharp increase in forward bookings and new project starts across the service sector. If the rebound in order books continues along its recent trajectory during the rest of the second quarter, then service sector output growth looks very likely to surpass the survey-record high seen back in April 1997.

The vaccination programme is boosting business confidence, he adds, meaning some firms can’t find enough workers:

“The successful vaccine roll out continued to underpin expectations of a strong recovery in the year ahead, with service providers responding by boosting employment and investment spending during April.

Job creation was the strongest for five-and-a-half years and, for the first time since the start of the pandemic, there were reports citing staff shortages as a factor holding back growth

UK services firms are also facing higher costs, including transport bills, with some saying they’re paying higher wages due to staff shortages.

The Services PMI report says inflationary pressures remained high last month:

Input prices rose at the strongest pace for just over four years. The wide range of factors cited as pushing up operating costs included transport surcharges, staff wages, and the pass through of higher imported raw material costs by suppliers.

Efforts to mitigate rising input prices resulted in a robust increase in average charges among service providers during April. However, the rate of prices charged inflation moderated very slightly from the 40-month high seen in March.

UK services sector sees fastest growth since 2013

Britain’s services sector has posted its fastest growth in more than seven years, highlighting how the economy is recovering from the pandemic.

The latest Service PMI, which tracks activity across the sector, has jumped to 61.0 for April, its highest reading since October 2013 (any reading over 50 shows growth).

Companies say they saw a sharp increase in business and consumer spending last month. New projects and forward booking jumped, with new orders rising at their fastest rate since December 2013.

IHS Markit, which compiles the report, says services companies reported a jump in demand as pandemic restrictions were eased, and optimism about the economic outlook rose.

Service providers noted that the roadmap for easing COVID-19 restrictions across the UK had been a key factor helping to boost activity. There was a direct boost to output from the reopening of some customer-facing parts of the economy in April, as well as a positive impact on the rest of the service sector due to improving business and consumer confidence.

Firms also took on more staff to handle this surge in orders - with employment growth accelerating to its fastest since October 2015.

Markit adds:

Stronger demand encouraged a faster pace of job creation across the service sector in April. The latest survey pointed to the sharpest increase in employment for five-and-a-half years. Despite efforts to rebuild business capacity, backlogs of work rose at the steepest rate since March 2015.

Survey respondents often noted that a combination of better-than-expected demand and subsequent staff shortages was the main reason for an accumulation of unfinished business.

UK services PMI
UK services PMI Photograph: IHS Markit

At 61.0, the services PMI was much stronger than March’s 56.3, and also above a ‘flash estimate’ of 60.1 during April, suggesting activity picked up towards the end of the month.

German factory orders jump

Germany’s economy is also strengthening.

German factories have reported a jump in orders for the third month in a row, as its manufacturing sector continues to shine despite the pandemic.

Industrial orders jumped by 3% in March, ahead of target, driven by rising remand within Germany. Domestic orders increased by 4.9% month-on-month while foreign orders went up by 1.6%.

Germany’s economy shrank by 1.7% in Q1, but this suggests its economy is recovering.

Bloomberg says:

Demand for machinery, data processing equipment, electrical and optical goods as well as car manufacturing was particularly strong, the Economy Ministry said. Helped by strong recoveries abroad, German manufacturing has held up well during the latest rounds of restrictions to limit the spread of the coronavirus.

The high level of activity means companies are now battling with unprecedented supply-chain problems as shortages of parts and raw materials add to a spike in freight costs.

Quite a lot of upbeat corporate news this morning...

An Aston Martin DBX SUV on display during the 18th Guangzhou International Automobile Exhibition, China last November.
An Aston Martin DBX SUV on display during the 18th Guangzhou International Automobile Exhibition, China last November. Photograph: VCG/Getty Images

Luxury carmaker Aston Martin has reported a jump in sales that helped it cut its losses.

Aston Martin sold 1,353 vehicles in the first quarter of 2021, with the launch of its first sport utility vehicle, the DBX, boosting sales.

That’s a 134% increase on the 578 sold in January-March 2020, early in the pandemic. Pre-tax losses fell to £42.2m, from £110.1m, with revenues jumping to £224.4m from £88.8m.

Aston Martin was rescued from collapse in January 2020 by billionaire fashion tycoon Lawrence Stroll, who says he’s “delighted with the great progress”.

Aston Martin is sticking with its current guidance for 2021, adding:

The uncertainty surrounding the duration and impact of the pandemic on the global economy continues, with the pace of emergence from lockdown and recovery in consumer demand varying significantly across geographies.

UK engineering firm Melrose has become the latest company to flag that the global shortage of semiconductors will hamper its growth.

Reuters has the details:

Britain’s Melrose Industries warned on Thursday its growth would be hit by a shortage of chips in the automotive supply chain as it recorded a rise in sales so far in 2021 thanks to a recovery in demand for cars and powder metals.

The owner of GKN, which supplies parts to carmakers such as Volkswagen, said it was performing modestly ahead of its expectations, with sales for the four months ended April 30 up 8%.

FTSE 100 hits fresh 14-month high

Britain’s blue-chip FTSE 100 index has hit a new 14-month high in early trading.

The Footsie has risen around 0.35% to 7066 points, its highest level since late February 2020 when the Covid-19 pandemic sent markets crashing.

The FTSE 100 over the last two years
The FTSE 100 over the last two years Photograph: Refinitiv

Next is the top riser, up 2.3%, after lifting its profit forecast this morning.

Engineering firms Melrose (+2.3%) and Rolls-Royce (+2%) are also in the risers, along with British Airways owner IAG (+1.7%) - suggesting optimism about the reopening of economies this summer.

Barratt have jumped 1.4% after lifting its house completion forecast today.

Barratt Britain: homebuilder expects busier year

UK housebuilder Barratt Developments is also upbeat this morning, telling the City it expects to complete homes than previously estimated.

Barratt says it has seen strong customer demand, with the underlying market also robust.

It says:

Reflecting both strong trading and our successful increase in construction activity, we now expect FY21 wholly owned completions to be between 16,000 and 16,250 homes and to deliver around 650 JV [joint venture] home completions.

As a result, we now expect an outturn for the full year modestly above the Board’s previous expectations.

Mortgage lending surged after the first lockdown lifted, with the stamp duty holiday boosting demand, and helping to drive prices to record levels.

Speaking of Barratt....The Economist’s Duncan Weldon recently looked at the rise of housing estates around the country, and the impact of ‘Barratt Britain’.

He wrote:

As young professionals priced out of big cities are well aware, Britain does not build enough homes. But some parts of the country have done better than others. The north and the Midlands have accounted for a rising share of housing investment over the past two decades, with big builders such as Barratt, Persimmon and Taylor Wimpey responsible for much of the work.

And this is having an impact on the political landscape of the country (timely, as we head to the polls today), Weldon added:

There is an egalitarianism to Barratt Britain. Accountants, teachers, sales reps, plasterers and driving instructors live on the same street, and the smaller choice of pubs and restaurants means they socialise together, too.

As long as mortgages remain affordable and petrol is cheap, it is not a place that worries much about politics. That is a boon for the government, and a problem for Labour...

Updated

RICS: UK construction sees biggest rise in workload since 2016

UK builders are also seeing a surge in demand - and a struggle for raw materials.

The Royal Institution of Chartered Surveyors reports today that Britain’s construction sector is seeing the biggest increase in its workload in five years, due to strong demand for housing and the resumption of other projects.

Materials shortages are the biggest challenge for construction sector growth this year as the industry continues its recovery from the covid-19 pandemic, RICS warns.

Next lifts profit guidance after post-lockdown sales boost

The Next store at Fosse Park, Leicester.
The Next store at Fosse Park, Leicester. Photograph: Ross Kinnaird/Getty Images

UK retail chain Next has hiked its profit guidance, having seen stronger trading than expected in recent weeks as the lockdown lifted.

Next has increased its central guidance for full year profit before tax by £20m to £720m, after making £75m more “full price sales” than expected. It had already raised its profit forecast once this year, at the start of April.

Next says:

Full price sales in the thirteen weeks to 1 May were down -1.5% on two years ago. Our previous central guidance assumed that Q1 would be down -10% and we have beaten this Q1 forecast by £75m.

Almost all of Next’s high street shops were closed under the lockdown, with the majority reopening on 12 April when curbs on non-essential stores were lifted.

It says:

In the last three weeks sales have been exceptionally strong and, versus two years ago, total full price sales were up +19%. In that period, full price sales in like-for-like Retail stores were up +2% and Online sales were up +52%.

Next’s sales figures

But it warns that this boost probably won’t last:

The strong sales growth we have experienced in the last three weeks is due to pent-up demand built up over the last three months and is very unlikely to be indicative of demand for the rest of the year.

Economist David Owen of Jefferies also expects the Bank to raise its growth forecasts today:

An upward revision to the BoE’s 2021 GDP forecast is almost a given. Of more interest is what, on a 3 year view, they say on inflation and whether they decide to taper.

Net gilt purchases are running at just under £4.5bn a week. Reduce that to £2.5bn a week and they would still hit their £895bn target for the outstanding stock of QE (including £20bn of credit) by year end.

This chart, from Jefferies, also shows how UK economic activity picked up in April as some lockdown rules were eased.

Jefferies economic activity radar for US, UK and eurozone

The Bank of England will say today that Britain’s economy is heading for a much stronger recovery this year than it previously expected, predicts Reuters:

The BoE forecast in February that the world’s fifth-biggest economy would grow by 5% in 2021, having slumped by 10% in 2020.

That was a bigger hit than in most other European economies after Prime Minister Boris Johnson was slower to impose a coronavirus lockdown and had to keep it in place for longer in an economy heavily reliant on face-to-face consumer services.

But many economists say Britain is now set to grow by more than 7% this year, boosted by its fast COVID-19 vaccinations.

“There’s a growing sense that the UK is finally on the way out of the pandemic, and with that comes an increased focus on the Bank of England’s future tightening plans,” analysts at ING said in a note to clients. “Indeed, we think the Bank may announce some tapering of its quantitative easing programme.”

Introduction: Bank of England meeting today

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

The Bank of England sets UK interest rates at noon today, against the backdrop of an economic recovery as the country slowly emerges from lockdown and more people are vaccinated.

Private sector growth is the fastest in years, mortgage lending is at a record, and economists are predicting the biggest bounce in GDP since the 1940s.

Investors are also upbeat. The FTSE 100 share index hit its highest level in over a year yesterday, with mining giants, oil companies and banks among the risers -- all companies who benefit from a global rebound.

The FTSE 100 index over the last two years
The FTSE 100 index over the last two years - it jumped back over 7,000 points yesterday. Photograph: Refinitiv

So with the economic picture brightening, the BoE is expected to raise its growth forecasts today, in its latest Monetary Policy Report (also released at noon).

Elsa Lignos of RBC predicts that the Bank will predict a smaller spike in unemployment this year:

Significantly, the extension of the government’s furlough scheme, which was announced at the budget, is likely to see the MPC lower its estimate of where it expects unemployment to peak once support is withdraw.

This optimism certainly isn’t expected to trigger an interest rate rise from their current record low of 0.1%.

But...the Monetary Policy Committee will be pondering when it should slow, or taper, its £895bn asset purchase stimulus programme, which is buying up around £4.4bn of government bonds each week.

Any hawkish signals about that could also sent the pound higher (it’s currently trading at $1.39).

Shamik Dhar, chief economist at BNY Mellon Investment Management, says the prospects for the UK economy “look bright”.

Thanks to an impressive vaccine rollout, the economy looks set to bounce back strongly in the second half, probably at double digit annualized growth rates, returning overall activity to pre-crisis levels this year. Inflationary pressures might build, but will probably be contained by a strong supply response in those industries that have been locked down. The Bank of England (BoE) remains a long way off tightening monetary policy, but could be one of the first central banks to signal it’s thinking about it, possibly in early 2022.

This said, the BoE is thinking about switching the traditional sequencing of the policy tightening, with hikes in the policy rate possibly coming before a shrinkage in the balance sheet, and is expected to provide guidance on this issue in the next policy meetings. We anticipate that much of the fiscal deficit will correct automatically as private sector economic activity picks up strongly, but the Chancellor may need to raise taxes modestly further from here. Longer term, the public debt burden will fall so long as the yield on gilts remains lower than the nominal growth rate of the economy.

But the economy won’t return to its pre-Covid state, of course, Dhar adds:

“The economy will return to pre-crisis levels of economic activity quickly, and possibly recover the pre-crisis trend level next year. But the composition of the UK economy has probably changed permanently thanks to the pandemic. While we will see a strong bounce back in ‘close contact’ industries, such as hospitality and travel, this year and next, they may never recover their pre-crisis share of the economy. ‘Remotely-consumed’ goods and services will remain a larger proportion of the economy than they were pre-pandemic.

European stocks are expected to open a little higher, with new eurozone construction data, the final UK services PMI for April, and the weekly US jobless report also coming up.

The agenda

  • 7am BST: German factory orders for March
  • 8.30am BST: Eurozone construction PMI for April
  • 9.30am BST: UK services PMI for April
  • Noon BST: Bank of England interest rate decision
  • Noon BST: Bank of England publishes Monetary Policy report
  • 1.30pm BST: US weekly jobless claims figures

Updated

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