Equities however have remained robust with some indices reaching  6  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  6  record highs last week, a trend which the Bank’s Financial Policy Committee drew attention to in its July Financial Stability Report. In the UK, the GDP releases for March and April revealed notably stronger growth than we had expected in May, with monthly growth rates of 2.1% and 2.3%. At the time of our June meeting Bank staff had revised up their expectations for 2021 Q2 GDP growth to 5½% on the previous quarter, from 4¼% at the time of the May Report. That would be consistent with output in Q2 being less than 4% below its 2019 Q4 level. The monthly figure of 0.8% growth for May, released last Friday, contained some offsetting downside news. Within that however consumer-facing services continued to grow, with the drag coming from sectors like cars and construction where demand was constrained by supply shortages – a theme I will come back to. The UK labour market has also outperformed our May expectations, with unemployment falling to 4.7% and employment growing 0.3% in the three months to April. That continues a trend of downside surprises to our unemployment forecasts over the past year, even after allowing for the extensions to the furlough schemes. The falls in unemployment have however been accompanied by higher inactivity.
The fact that many people have entered the stock market in a short time is not entirely a good thing. Besides the losses they may incur and thereby run into financial difficulties, there is a risk of the stock market functioning less well because prices bolt from more fundamental levels. An example of this is the IT bubble in recent years. The ease with which firms attract capital in an over-valued market leads to misinvestment which, if it becomes too prevalent, can be harmful for society in general when the economy and the stock market both turn downwards. The behaviour of inexperienced investors is thus a general economic issue. The American study argues that firms, banks and analysts had incentives to talk inexperienced people into investing in new enterprises on grounds that were not entirely sound. Many new technology companies were not generating a profit and had to rely instead on paying for wages and equipment by issuing shares. For this to be feasible, stock markets need to be high. In this sense there were incentives for managements to trim reports and statements about their firm’s future profits. At the same time, analysts and investment banks, with potential earnings from launching share issues, lacked incentives to take a critical look at these reports and statements. Inexperienced investors did not get the assistance and support they needed. As a sign of this, the paper mentioned that in summer 2000 professional analysts were summoned to Washington for a congressional hearing on their market recommendations.