UK equity market review: Signs of building inflationary pressures

Non-essential shops reopened in April and retail sales rose sharply in April, climbing by 9.2% from March. In particular, clothing sales rose by 69.4% over the month. Nevertheless, the British Retail Consortium (BRC) warned that demand remains “fragile”.


  • The OECD raised its forecast for UK GDP growth to 7.2% in 2021
  • Government borrowing eased in April but remained exceptionally high
  • The rate of profit warnings dropped in Q1

Non-essential shops reopened in April and retail sales rose sharply in April, climbing by 9.2% from March. In particular, clothing sales rose by 69.4% over the month. Nevertheless, the British Retail Consortium (BRC) warned that demand remains “fragile”; footfall remains 40% below pre-pandemic levels and 530,000 retail workers remain on furlough. High-street fashion retailer Next increased its full-year earnings forecast but warned that the post-lockdown surge in sales was attributable to pent-up demand and was therefore likely to prove “short-lived”. The FTSE 100 Index and the FTSE 250 Index both ended May 0.8% higher.

“The key, policy-wise, will be to ensure this boom does not turn to bust” (Andy Haldane; BoE)

The Organisation for Economic Co-operation & Development (OECD) upgraded its forecast for UK economic growth to 7.2% but warned that increased border costs following Brexit are likely to affect foreign trade; the OECD believes a closer trade relationship with the EU would improve the economic outlook in the medium term. The OECD called on the UK Government to maintain its support until economic recovery is “firmly under way” but urged it to focus its resources on companies and sectors with the strongest growth prospects.

The level of government borrowing eased in April compared with March as the economy reopened, although it was still the second-highest April on record at £31.7 billion.

UK listed companies issued their lowest number of first-quarter profit warnings for 21 years according to EY. As economic growth recovered, businesses successfully met or exceeded profit targets that had been “dramatically” cut by the Covid-19 pandemic. As a result, only 50 profit warnings were issued during the first three months of 2021, compared with 301 in the same period of 2020. The top FTSE sectors to experience profit warnings during the first three months of 2021 were retailers with eight warnings, and travel & leisure with five warnings.

In an article written for the Daily Mail, the BoE’s Chief Economist Andy Haldane sounded an optimistic note for the UK economy, saying: “A year from now, it is realistic to expect UK growth to be in double-digits, activity to be comfortably above pre-Covid levels and unemployment to be falling”. Nevertheless, he sounded a note of caution, warning: “The key, policy-wise, will be to ensure this boom does not turn to bust. The most likely cause of such a bust, history tells us, is an unwanted bout of inflation.”