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China economy
OpinionComment
Patrik Schowitz
Patrik Schowitz

Macroscope | Why fears over slowing global Covid-19 recovery are premature

  • Setbacks in the recovery are always possible, and news on the Delta variant and Chinese economic momentum will need to be closely watched
  • But looking at economic fundamentals, this time it seems likely that it is bond markets that have got carried away with a gloomy world view

Reading Time:3 minutes
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A man walks past a bank’s electronic board showing the Hong Kong share index on July 7. Both the equity and credit markets have been relatively unperturbed by growth worries. Photo: AP
Patrik Schowitz

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.

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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.

Key among these worries is the spread of the more infectious Delta variant of Covid-19 in Europe and the US, which is already leading to some retightening of social-distancing restrictions.
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.
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