As we pass the halfway mark of 2021, investor worries about the growth outlook have once again begun to stir. The main trigger for this has been the recent fall in longer-term government bond yields, first and foremost in the United States but also in other parts of the world such as Europe and China.
The key global benchmark 10-year US Treasury interest rate plunged as low as 1.3 per cent last week from a high of 1.75 per cent at the end of March. Meanwhile, the Chinese 10-year government bond yield broke below 3 per cent for the first time in a year.
Generally, bond yields rise with expectations of stronger economic growth, higher inflation or a combination of both. US inflation has
picked up recently as strong demand sparked by the economic reopening collided with supply chains still in some disarray, but this is widely expected to be a temporary problem.
At first, the fall in bond yields was not necessarily bad news as it signalled fading concern that inflation might be more stubborn and persistent. However, this has broadened out into worries that global economic growth might not be as strong or long-lasting as had been expected.
Meanwhile, some commentators have begun to worry that without further constant rounds of policy stimulus, the global economy might revert to the pre-pandemic state of prolonged anaemic growth and low interest rates. These concerns were first exacerbated by the US Federal Reserve at its June meeting, when the central bank hinted at
somewhat tighter policy than most had expected, and more recently by Chinese authorities’ announcement of a cut in the
reserve requirement ratio for banks.
Although it is still too early to be sure, the latter might prove to be the first step towards more monetary
policy easing in China. This would be a notable turnaround from the moderately tight policy that Chinese policymakers had been expected to pursue.
It could raise concerns that the change was prompted by a worsening economic outlook, with the Chinese post-pandemic recovery potentially
running out of steam earlier than expected.
So far, the growth worries seem exaggerated in the light of economic data. True, the rebound in the
US jobs market is not going as fast as many had hoped, but that should pick up as lingering pandemic-driven disruptions fade.
While high-frequency measures of economic growth have begun to fall back from elevated levels in both the US and China, they remain at robust levels. Growth in Europe is still accelerating despite worries about the Delta variant.
In any case, a peaking of growth rates should not be a surprise for investors. For some time, economists have been broadly forecasting that, following an initial reopening-driven growth surge, there would be a series of rolling growth peaks across the major world economies this year, with
Chinese growth peaking in the first quarter, followed by the US in the second, Europe in the third and Japan likely in the fourth.
This is arguably what we are seeing, but crucially global growth should stay strong for the next one to two years. It should be driven by households in the US and Europe spending down savings they have accumulated because of
government support during the pandemic, as well as a likely surge in corporate capital expenditure on the back of a strong recovery in profits.
Looking around financial markets, it is noticeable that bond markets are the odd one out. Despite the occasional bout of nervousness, both equity and credit markets have been relatively unperturbed by growth worries. This is especially true in developed markets, where equities continue to set
record highs on a regular basis.
When bond and equity markets disagree, commentators often assume that prudent bond markets will win out over skittish equity markets. Yet looking at economic fundamentals, this time it might just turn out that it is bond markets that have got carried away with a gloomy world view.
Clearly, setbacks in the recovery are always possible, and news on the Delta variant and Chinese economic momentum will need to be closely watched. Still, on balance it seems hasty to bet against a continuation of the global post-pandemic recovery and further gains in risky assets ahead.
Patrik Schowitz is a global multi-asset strategist at JP Morgan Asset Management
