The Bank of England Prophecies
BOE PREDICTS A QUICKER RETURN TO PRE-COVID GDP LEVELS Sterling markets exhibited volatility in reaction to the Bank of England (BoE) policy announcement on Thursday. Policy settings were left unchanged, with Bank Rate maintained at 0.1% and the total stock of asset purchases at £895bn (although weekly pace purchases will be tapered). The focus centred on upgrades to GDP growth forecast for this year from 5% to 7.25%, reflecting a much smaller contraction in Q1 than previously assumed, and also a quicker lifting of Covid restrictions and an assumption that households will spent a higher proportion of accumulated savings. The forecasts also accounted for the March Budget measures such as the extension of the furlough scheme. The BoE now expects the peak in unemployment (currently at 4.9%) to be much lower at 5.4% in Q3 and for a quicker return to pre-Covid GDP levels by the end of this year.
Accompanying the boost to projections for economic growth were upward revisions to the economy’s supply capacity, with scarring effects of the pandemic seen as less negative than previously anticipated. Hence, beyond this year’s energy-related jump, CPI inflation is forecast to be around the 2% target over the medium term, conditional on very gradual rises in Bank Rate. In the financial markets, the initial reaction included a spike higher in the pound and gilt yields, but they ended the day below where they were prior to the BoE policy decision. The biggest driver of markets for this week, though, was today’s (Friday’s) weaker-than-expected US labour market report (see next page), which weighed on the US dollar and bond yields. As the time of writing, the pound had gained about 1% on the week against the US dollar to $1.3950 and the 10-year gilt yield was down 9bps at 0.75%.
NEGATIVE Q1 GDP, BUT POSITIVE MOMENTUM Next week’s UK data focus will be official GDP figures (Wed) for March and Q1 overall. We expect March GDP to have risen by 1.2%, led by a 2.0% increase in services activity including the reopening of schools, as well as a 1.0% rise in industrial output. That would be the second consecutive rise in monthly GDP following the drop in January. For Q1, we expect GDP to have fallen by 1.7%, but the positive momentum through the quarter is expected to help lead to a return to positive quarterly growth in Q2. Also of interest will be the March international trade figures (Wed) in light of reported disruptions, partly related to new EU trading arrangements. The February data showed a recovery in exports to the EU, but they remain down in the year-on-year comparison. Also out next week are the British Retail Consortium’s retail trade monitor (Tue) and the RICS housing survey (Thu), both for April. This weekend should also see the final results in a number of UK electoral contests, including for the Scottish Parliament with markets watching to see whether the SNP wins a majority.
US PAYROLLS MISS; CPI AND RETAIL SALES NEXT WEEK
US economic data over the past week were on the soft side of expectations, but for the most part continued to show strong activity, aided by monetary and fiscal policies, and progress in combating Covid. The manufacturing and services ISM surveys for April remained strong at 60.7 and 62.7, respectively. Official labour market figures showed the economy added ‘only’ 266k jobs in April, well below expectations for 1000k, while the prior two months were revised down by a total of 78k. Taking a step back, the US has added 1.8 million jobs in the first four months of the year, but employment is still about 8 million below pre-pandemic levels. The unemployment rate, meanwhile, unexpectedly edged up to 6.1% from 6.0%, but the ‘true’ figure is likely to be higher given the fall in the labour participation rate since the start of the health crisis. Next week’s key releases include CPI inflation (Wed), retail sales (Fri) and industrial production (Fri).
Analysts are forecasting annual CPI inflation to increase to 3.7% in April from 2.6% in March and the core measure, excluding food and energy, to rise to 2.3% from 1.6%. There is some uncertainty regarding the retail sales forecast after the Biden stimulus resulted in a near-10% surge in March, but we have pencilled in an increase of 1.0% in April. We also see a 1.3% rise in industrial output and the preliminary University of Michigan consumer sentiment index (Fri) to rise to 90.0 for May. Despite the economic data, Federal Reserve officials still see significant spare capacity in the economy and the rise in inflation as transitory. They have stuck to their view for now that it is too early to even talk about tapering of asset purchases, but the pressure to do so will increase as the economic recovery continues. There will be a number of Fed speakers next week to clarify their latest views on the economic outlook, including Fed Governors Brainard (Tue), Clarida (Wed) and Waller (Thu), and St Louis Fed President Bullard (Wed).
GERMAN ZEW SURVEY AND UPDATED EU FORECASTS In the Eurozone, the German ZEW survey (Tue) is the main release. It is a survey of financial professionals, but it sometimes provides a useful guide to business surveys due later in the month. Analysts see further improvements in the current situation index to -40.0 and a potential rise in the expectations component to 73.0 after last month’s setback. Eurozone industrial production (Wed) should show a rise of about 0.4%, based on current national returns, with a sharp rise in the year-on-year comparison due to base effects. The European Commission’s updated economic forecasts (Wed) may attract some attention ahead of the ECB’s update next month. The Commission previously forecast Eurozone growth of 3.8% this year and any changes, including a possible upward revision, will probably be small.
Elsewhere, China releases CPI and PPI inflation (Tue), both of which are forecast to rise, the latter partly reflecting rising commodity prices.
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