E Britain Is Back

Today Britain is back at work and we have 3 or 5 company news items from the Mother Country. It is buoyant because England is going to reopen earlier than expected thanks to the speedy rollout of Covid-19 inoculation.

But consider macro-effects of the Biden Administration's spending spree. It used to be said that when America sneezes Britain catches a cold. But now there is a reverse process at work. The US stimulus package benefits British investors two ways, writes George Trefgarne of Boscobel and Partners in a post published by UK brokerage Hargreaves Lansdown:

“First, by lifting demand for goods and services across the world. The Paris-based OECD (Organisation for Economic Co-operation and Development) last week upgraded its estimate for world GDP growth in 2021 by 1% to 5.6%. It said: 'Vaccine rollout, although uneven, is gaining momentum and government stimulus, particularly in the United States, is likely to provide a major boost to economic activity.' 'The OECD’s analysis raised its forecast for UK growth to 5.1% for this year and 4.7% in 2022 – up from its December estimates of 4.2% and 4.1% respectively.'

“The Bank of England joined in. Alongside its decision to hold interest rates at 0.1%, it said that since February, 'developments in global GDP growth have been a little stronger than anticipated, and the substantial new US fiscal stimulus package should provide significant additional support to the outlook.' 'Chancellor Rishi Sunak was too downbeat about the outlook for the British economy in the Budget. He based his tax numbers on the forecasts for the economy from the Office of Budget Responsibility which completed its work in February before the US stimulus was approved. It said it is predicting only 4% growth in the UK this year, though an acceleration next year.” (The OBR has now restated estimates for the 2020-21 fiscal year ending in April saying its forecast 'looks set to undershoot our latest estimate').

“The second benefit investors could see from the US stimulus package will likely be through the stock market. A poll of more than 400 citizens with brokerage accounts by Deutsche Bank found that the growing number of American retail investors plan to invest substantial amounts of the stimulus cash. Investors in the 25-34 age group plan to invest 50% of their payments. It’s also been estimated that retail investors are likely to buy up to $3 bn worth of equities on the stock market once the stimulus cheques land.”

“If the outlook for the world economy is so positive, how come stock markets, especially in the US, have been so volatile in the last month? The answer could be that investors are starting to worry that a rapid recovery could bring inflation. The Federal Reserve raised its inflation forecast from 1.8% to 2.4%. These worries have found their way into the bond market. The 10-year yield on US Treasuries have hit 1.75%, their highest since before the pandemic. However, a prolonged rise in inflation is unlikely. Unlike in the 1970s, there is no shortage of commodities like oil, natural gas, metals, or foodstuffs. Additionally, technological advances in, say, retail distribution, continue to bear down on prices. Another source of inflation can be employees demanding pay rises. But with unemployment on the rise in the wake of the pandemic, that is not likely to gather steam any time soon.”

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William K. 1 week ago Member's comment

Always interesting and always informative, V.L! Thanks.