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.... And here’s an emoji-filled summary :) 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: 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. 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. 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 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. 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. 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.