Aurelia Butler

ORLANDO, Fla. (Reuters) – Hedge funds look to be on the right side of the seismic moves in Treasuries that have propelled short-dated borrowing costs higher, intensified flattening pressures across the yield curve, and ripped up the consensus 2022 U.S. interest rate outlook.Futures market data for the week through Feb. 8 showed speculators flipped to a net short position in two-year Treasuries for the first time this year and cut their net short position in the 10-year space to its smallest since October.A deeper dive into the latest Commodity Futures Trading Commission report reveals that the bearish momentum in two-year futures is accelerating fast, and offers signs that bullish sentiment in 10-year bonds is emerging.Together, this shows funds are betting that the 2s/10s yield curve will continue to flatten. CFTC 2-Year Treasuries – https://fingfx.thomsonreuters.com/gfx/mkt/gdvzynejepw/CFTC2Y.png The CFTC data are for the week through Tuesday Feb. 8, two days before figures showed inflation in January jumping to a 40-year high of 7.5%.That triggered a 24-basis point rise in the two-year yield, the most for a single day since June 2009, and a 13 basis point narrowing of the spread between two- and 10-year yields, the fourth biggest compression in a decade. Money markets are now pricing in at least 150 basis points of tightening from the Federal Reserve this year, starting with a 50 bp rate hike in March, and Wall Street banks have revised their Fed outlook sharply higher.Hedge funds were net short 11,430 contracts of two-year Treasuries, the first net short this year. The week-on-week swing of around 59,000 contracts was the biggest bearish shift since October.A short position is essentially a bet that an asset’s price will fall, and a long position is a bet it will rise. In bonds, yields rise when prices fall, and move lower when prices rise.The swing to a net short position was down to funds opening new shorts and closing out longs. Momentum indicators show that momentum on the short side is the strongest in a year. CFTC 2-Year Treasuries Short Momentum – https://fingfx.thomsonreuters.com/gfx/mkt/jnvwelzkovw/CFTC2YMOM.png The CFTC data also showed that funds cut their net short 10-year U.S. bond position by some 73,000 contracts to around 202,000, its smallest since October. The change was almost entirely due to fresh longs being opened, perhaps indicating that a more fundamental shift in outlook is underway.Collectively, that’s a bet on a higher two-year yield and lower 10-year yield. This trend has been in place for months but is accelerating rapidly. The curve is only 40 basis points from inversion, the red flag that has preceded all six recessions in the past 45 years. If the Fed follows through on expectations for the most aggressive tightening cycle in a quarter of a century, recession in 2023 or 2024 is a clear and growing risk.”It is widely accepted that the Fed had over-stimulated and has been significantly behind the curve over the last several months. However, it does not make sense to compound that mistake by swinging to the other extreme. Errors are additive; they do not cancel out,” Citi rates strategists wrote on Friday. US 2s/10s Yield Curve & Recessions -https://fingfx.thomsonreuters.com/gfx/mkt/zgpomjeyxpd/YCRECESSION.jpg On top of the economic reasons for buying 10-year bonds and betting on further flattening of the yield curve, there may also be technical arguments for doing so. Only two weeks ago, speculators’ long positions in 10-year futures were barely 400,000 contracts, the lowest in almost five years. There is room to add, especially with a yield of 2% on offer. And if Russia invades Ukraine, the most liquid and safest market on the planet might be expected to draw strong investor demand, regardless of the inflation or technical picture.Macro strategies made money in January, bucking the wider downtrend across the hedge fund industry. Funds betting on higher short-term yields and flatter curves will be sitting pretty for another positive month in February. (The opinions expressed here are those of the author, a columnist for Reuters.) (By Jamie McGeever; Editing by Sam Holmes) More

As Argentina’s president Alberto Fernández backed out of Beijing’s Great Hall of the People, his ambassador delivered a final message to Chinese leader Xi Jinping: “Without the Communist party, there would be no new China!”The jingoistic line — the title of a famous revolutionary song — was received warmly. “Well said, well said,” Xi responded last week from behind a surgical mask embossed with the red flag of the People’s Republic of China. “Thank you for your support.”The exchange — later broadcast by Chinese state media — was one of a series of meetings held between China’s leaders and more than 30 autocrats, democratic leaders and royals on the sidelines of the Winter Olympics.They came to Beijing despite US calls for a diplomatic boycott in protest at Xi’s crackdowns on Xinjiang and Hong Kong and highlighted China’s new standing in the international order, according to former government officials and China foreign policy experts. “The vision of foreign heads of state speed dating with Xi Jinping in Beijing is something to behold,” said Nadège Rolland, a former senior adviser to the French defence ministry, who compared it with the ancient Chinese tributary system.The visitors included Vladimir Putin of Russia, Abdel Fattah al-Sisi, Egypt’s president, as well as Imran Khan, Pakistan’s prime minister, Aleksandar Vucic, president of Serbia and the leaders of each of the five central Asian former Soviet states. Saudi Crown Prince Mohammed bin Salman had been scheduled to travel to Beijing but cancelled, but Saudi Princess Reema bint Bandar, who is also the kingdom’s ambassador to the US, did attend, along with Mohammed bin Zayed, the crown prince of Abu Dhabi and de facto leader of the United Arab Emirates, and Sheikh Tamim bin Hamad al-Thani, Qatar’s emir. Their warming ties with Beijing clashed with US president Joe Biden’s aims to rebuild American partnerships in response to China’s rising military assertiveness and expanding global influence. China has also offered support for Moscow as the west opposes Russia’s military build-up on the Ukraine border, deepening Beijing’s divide with Washington.

Xi joined Russia in opposing Nato expansion after a summit in Beijing with President Vladimir Putin, a significant step up in China’s backing for Moscow © Aleksey Druzhinin/Sputnik/Reuters

The Olympics, according to Dawn Murphy, a foreign policy expert at the US Air War College and author of China’s Rise in the Global South, has illustrated that “China has a lot of friends in the international system” after years of building stronger economic and political bonds, particularly in the developing world. “Many of these countries have a deep appreciation for China’s non-interference and non-intervention stance, associated with sovereignty,” she added. The meetings have been used to unveil a number of initiatives, including Xi backing Putin’s opposition to Nato expansion and new Sino-Russia gas deals. Argentina joined the Belt and Road Initiative, Xi’s flagship infrastructure building programme, paving the way for waves of investment into South America. Analysts expect new Chinese arms sales to Pakistan to follow Khan’s meeting with Xi. Rolland, now with the National Bureau of Asian Research, a US think-tank, noted that in exchange for trade and investment the leaders paid “homage” and offered “deference” to Xi, and have endorsed the Chinese governance model. Such exchanges are part of an “older worldview, that is actually deeply ingrained in the way that Chinese elites are thinking about their own role on the global stage right now”, she said. Xi’s meetings with the leaders of Muslim-majority countries, such as Khan, spotlighted their silence over China’s actions in Xinjiang, the north-western region where more than 1mn Uyghurs have been interned. “Part of them not wanting to criticise China is because they don’t want to bring themselves criticism of their own internal human rights issues,” Murphy said, adding: “Many Arab countries do not necessarily see the Uyghurs as being ethnically the same as them because they come from Turkic origins.”The number of leaders and dignitaries in Beijing was still well below the more than 80 present inside the Bird’s Nest stadium for the opening of the Beijing Summer Olympics in 2008, which included former US president George W Bush and Nicolas Sarkozy of France.The stark difference in mood, according to Paul Haenle, a former senior US security and China adviser who travelled with Bush to the Games, reflected that the world was “dealing with a very different China today”.“There is an excitement for the athletes and for the competition. But it is not an excitement for China,” said Haenle, now director of the Carnegie-Tsinghua Center for Global Policy, a think-tank.In 2008, there was hope over China’s integration into the international system. But “China feels they’ve integrated into the system as far as they want to and it’s about the international order accommodating to China’s differences and preferences”. Xi’s burst of face-to-face diplomacy marked a change for the Chinese leader, who has not left his country since the start of the pandemic two years ago.

China’s media has attempted to portray the meetings and limited international boycott — nine governments, including the UK, Canada and Australia joined the US-led effort — as an act of “solidarity”. Beijing has also touted the “close friendship” between Xi and Putin. “The presence of the guests, despite the US-led farce of a so-called ‘diplomatic boycott’ of the Games, attests to another flop of the US,” one commentator wrote for Xinhua, the state news agency.However, despite signs of closer Sino-Russian ties Haenle questioned the enthusiasm in the halls of power in Beijing for Xi’s “bromance” with Putin.“When I talk to Chinese government officials about Russia policy, I don’t get the sense that there’s a great deal of shared culture and warmth between the two peoples,” he said.Additional reporting by Lucinda Elliott in Buenos Aires and Samer Al-Atrush in Jeddah*This article has been updated to reflect that Saudi Crown Prince Mohammed bin Salman did not attend the Beijing Winter Olympics. More

DUBAI (Reuters) – The United Arab Emirates and Indonesia are close to finalising a trade and investment deal after months of negotiations and could sign an agreement in March, officials from the two sides said.The UAE and Indonesia last September entered into talks for a Comprehensive Economic Partnership Agreement (CEPA) meant to eliminate tariffs and boost investment between the two nations.Emirati Minister of State for Foreign Trade Thani Al Zeyoudi told Reuters the two sides were close to a deal and that it could be signed as soon as next month.Similarly, Djatmiko Bris Witjaksono, a senior official at Indonesia’s trade ministry, said the two sides were working on finalising the agreement and that it could be signed in March.He declined to comment on what was still being negotiated.Indonesia is among several countries the UAE is exploring possible trade deals with. The UAE wants to conclude multiple trade pacts this year.Israel’s envoy to the UAE, Amir Hayek, on Monday tweeted that the latest round of trade talks with the UAE were under way.Among those that are being studied by the UAE is a potential CEPA with the six nation East African Community (EAC) trade bloc that includes Kenya, Rwanda and Tanzania, Al Zeyoudi said. More

Repo, or repurchase agreement, auctions are designed to increase banks’ capacity to manage their liquidity.Liquidity at such actions became more expensive after the central bank raised its key interest rate by 100 basis points to 9.5% on Friday. It indicated that a further rate increase was likely. ($1 = 76.8625 roubles) More

LONDON/UTRECHT, Netherlands (Reuters) – As electric vehicle (EV) sales rise, the big question for power grid operators, charging companies and governments is how to run tens of millions of vehicles without crashing local networks or spending billions on grid upgrades. The answer: smart charging. Simply put, smart charging software allows EV owners to plug in during expensive peak hours, without the vehicle drawing power until cheap off-peak hours. This eases strain on the electric grid, makes better use of renewable energy and saves drivers money.Without it, millions of EV owners plugging in after work – auditing firm EY estimates Europe will have 65 million EVs by 2030 and 130 million by 2035 – could overload local grids, causing blackouts.”The shift to electric will be nigh on impossible without smart charging,” Chris Pateman-Jones, CEO of British EV charger company Connected Kerb, told Reuters while demonstrating a pilot project on public chargers in Hackney, a London borough.Using Connected Kerb’s smartphone app you can set your charging speed, charge time and exact price down to a low, slow “Eco” rate of 19 pence (26 U.S. cents) per kilowatt.”It’s so much cheaper and simpler,” said Ged O’Sullivan, a 65-year-old pub owner who cut his plug-in hybrid’s charging bill by 30% with Connected Kerb. Smart charging for public chargers is a significant challenge because so few are available for people who cannot charge at home because they park on the street. According to a report from EY and Eurelectric, Europe alone will need 9 million public chargers by 2035, up from 374,000 today.The near future should also bring “bidirectional” or “vehicle-to-grid” charging, where millions of EV owners could sell their EV batteries’ juice back to grid operators during peak hours. Even in Britain where smart charging at home is widely available, many EV owners are unaware it exists, according to Britain’s energy regulator, Ofgem. In the United States, only a tiny fraction of utilities offer it, according to utilities group the Smart Electric Power Alliance.And few cars today beside Renault (PA:RENA) and Hyundai’s upcoming Ioniq model are capable of bidirectional charging – though more are coming. “Most cars, at this point, do not support this bidirectional charging yet,” said Robin Berg, CEO of We Drive Solar, which has supplied hundreds of bidirectional chargers for a pilot project in the central Dutch city of Utrecht and worked with Renault SA (OTC:RNLSY) and Hyundai Motor Co on their vehicles. “Other carmakers will follow.”Nearly 20% of new cars sold in the Netherlands and almost 12% in Britain in 2021 were fully electric.State support has put Norway at the forefront of electrification, where EVs made up almost three-quarters of sales in the capital Oslo. Some local substations were built in the 1950s and without smart charging Oslo would need massive, costly grid upgrades. “To handle this we need smart charging solutions because we don’t want to over-invest in the grid,” said Sture Portvik, who heads Oslo’s charging infrastructure efforts. ‘AWARENESS IS LOW’Connected Kerb aims to have 190,000 UK on-street chargers by 2030, enabling it to predict consumer charging patterns for grid operators and offer lower rates when the available renewable energy is abundant, said Pateman-Jones. “Today when there’s too much wind on the grid, wind farms are told to turn the wind turbines off,” he said. “With smart charging we can pull more of that power.”Some UK energy providers already offer low off-peak rates for home smart charging, but few EV owners use them.”The perception is smart charging at home is a done deal,” said Charlie Cook, CEO of Rightcharge, a UK firm that helps EV owners find low tariffs. “But the reality is awareness of these tariffs is surprisingly low.”Rightcharge estimates smart charging could save UK drivers 10 billion pounds ($13.5 billion) by 2030.British car dealer network Lookers guides EV buyers to Rightcharge’s website to check their options.Lookers’ business development director, Andrew Hall, said “early adopter” EV buyers are “pretty savvy about smart charging.””But that is changing as EV sales rise,” he added. Utilities group the Smart Electric Power Alliance estimates only 50 out of 3,000 U.S. utilities offer smart charging.EV charging company ChargePoint’s U.S. chargers can all smart-charge, but it wants more utilities to offer it.”We see a lot of positive response from customers when their utility is offering those rates,” said Anthony Harrison, ChargePoint’s North American head of utility partnerships.Charging provider Blink Charging Co (NASDAQ:BLNK) has one set rate until smart charging is widely available.”We decided to keep it simple for our customers,” said Blink CEO Michael Farkas. ‘HORRENDOUSLY EXPENSIVE’ Bidirectional charging may be crucial. “The whole idea behind bidirectional charging is to balance the grid,” said We Drive Solar’s Berg, who estimates a fully charged EV can power the average home in the Netherlands for a week.Serge Colle, EY’s global energy resources leader, said smart and bidirectional charging are better than “horrendously expensive” power grid upgrades.”We can’t possibly open up streets quickly enough to add more copper and do the necessary reinforcement,” Colle said. Regulator Ofgem estimates that peak power reductions from smart and bidirectional charging by 2050 could match “10 Hinkley Point C Nuclear Plants” – a two-reactor plant under construction in England.The U.S. market has more than 10 vehicle-to-grid pilot projects using school buses under way. California-based vehicle-to-grid company Nuvve Holding Corp has formed Levo, a joint venture with private equity firm Stonepeak – which chipped in $750 million – to enable EV fleet owners to sell power to utilities.”Because our customers are able to generate revenue we’re able to reduce the total cost of ownership for those vehicles, at times completely cost-neutral,” said Nuvve CEO Gregory Poilasne.Charger makers like Brisbane, Australia-based Tritium Dcfc Ltd are also developing bidirectional chargers. CEO Jane Hunter said Tritium will launch a bidirectional, fast-charging wall unit in 2023 for fleets and homeowners.More automakers are embracing bidirectional charging. Ford Motor (NYSE:F) Co has partnered with solar power company Sunrun (NASDAQ:RUN) Inc to use its F-150 Lightning pickup truck to power homes. But Oslo has invested extra money in pilot projects for bidirectional chargers because it believes in the concept. So far, however, it has been disappointed that more carmakers have not yet introduced vehicles that can feed power back into the grid.”The limitations for bidirectional charging has been the car producers,” infrastructure chief Portvik said. “The big carmakers have to step up.” ($1 = 0.7387 pound) More

Good morning. I was delighted to see the cover of this week’s Economist, which gestures towards the possibility of a market crash. It makes me worry less about a nightmare correction, which is something I tend to do, both as a natural pessimist and for the usual middle-aged reasons.

The cover is a good sign because, first, we journalists are not good at calling big inflection points in advance. Our strengths are asking good questions and noting important details, which are necessary but not nearly sufficient for predicting the future. When journalists get the future right, it’s almost always luck. Second, crashes by definition catch people by surprise and out of position. Fear of a crash makes a crash less likely. Deep breaths, everyone. Email me: [email protected]. How the Fed might think QT worksA few days ago I quoted economist Claudia Sahm saying this about the Fed, where she used to work:. . . the Fed is very uncomfortable with the balance sheet . . . they don’t know why it works or how it works. They don’t have enough data points on this working well. They can’t talk about that much in public because they don’t want to unsettle markets or themselvesThe idea that the Fed does not have a clear grasp of what effect building a $9tn balance sheet had on the economy, or what effect shrinking that balance sheet might have, is unsettling. So whatever vague collective presuppositions the Federal Open Market Committee does have about its balance sheet operations are important to markets, given the imminent shift from expansion to contraction.In this context, it is worth reading “Issues in the Use of the Balance Sheet Tool,” a 2020 review paper by three Federal Reserve economists. We know the paper was presented to the FOMC members — it says so right at the top. The paper covers a lot of territory quickly, but the key theme is the causal channels through which the balance sheet influences the economy. It focuses on three “traditional” channels: signalling, duration risk, and the portfolio balance. Signalling is the notion that a fixed quantitative easing programme commits the Fed to a certain timing of rate hikes — it makes the bank’s rate policy announcements more credible. In other words, investors can be confident rate increases won’t start until QE is over, because buying bonds while raising rates would be insane. QE is how the Fed “ties itself to the mast.” The duration-risk channel depends on the idea that by taking long-duration assets out of the hands of the public, the Fed reduces term premiums, bringing yield of long-lived assets down. The portfolio balance channel suggests that investors will replace the Treasuries bought by the Fed with imperfect substitutes — long-term corporate bonds, say — depressing yields on those assets, too. The first channel is about timing. The other two are about the impact of QE’s removal of government bonds from the financial system. What is striking about the “Issues” paper is that it does not focus much on what QE creates and puts into the system, and what quantitative tightening will take out of it and destroy: money. That is, it is not much concerned with the liquidity channel. Here is how that channel is described in a paper by Arvind Krishnamurthy and Annette Vissing-Jorgenson (a paper which “Issues” cites):The QE strategy involves purchasing long-term securities and paying for them by increasing reserve balances. Reserve balances are a more liquid asset than long-term securities. Thus, QE increases the liquidity in the hands of investors and thereby decreases the liquidity premium on the most liquid bonds . . . an expansion in liquidity can be expected to reduce such a liquidity premium and increase yields. This channel thus predicts that QE raises yields on the most liquid assets, such as Treasuries, relative to other, less liquid assets.This helps explain why 10-year yields fell the last time the Fed balance sheet shrank, in 2018-19. And, as we have discussed here before, one can push the liquidity channel account further. QT may increase the supply of (safe) Treasuries in the hands of the public, but its absorption of liquidity offsets that — leading to not only more expensive Treasuries but a rapid flight away from higher-risk assets, from high-yield credit to stocks. If the “Issues” paper is representative of Fed thinking, and as such the Fed discounts the liquidity channel, it may be surprised by what happens when it starts running off its balance sheet. Does the bond market know anything about inflation?I was a little alarmed when I read this passage in Jack Hough’s column in Barron’s this weekend: Aren’t low bond yields telling us that inflation will come down quickly? Yes, but there are three problems with banking on that. First, yields have been tiptoeing higher . . . Second, as of this past week, the Fed was still buying Treasuries to suppress their yields . . . The third problem with listening to Treasuries is that they don’t seem to know anything. Jim Reid, the top credit strategist at Deutsche Bank, recently plotted historical 10-year Treasury yields against what the inflation rate turned out to be over the following five years. The pattern looked a bit like a milkshake made with the blender lid off . . . Treasury yields now are probably saying nothing [about inflation]This newsletter has banged on at some length about how bonds, in the inflation debate, are rock-solid members of team transitory. Nominal and inflation-indexed yields both imply that inflation will come down fast. I find this fact comforting. Who am I, after all, to argue with the collective wisdom of the world’s bond traders?But maybe Hough is right and the world’s bond traders are, collectively, not very smart about inflation. I couldn’t find Jim Reid’s chart, so I drew up my own:This is not, on first look, a picture of prescience. Indeed, it makes it look as if inflation leads and bonds follow, dragging their feet. In the mid-1970s bonds failed to anticipate the high inflation of the late 1970s and early 80s, and were way behind the fall in inflation in the mid-80s. And since then, there has been few big shifts in inflation for bonds to anticipate. Well, maybe. Here’s another way to look at it. Since the big inflation shocks of the 1970s, the bond market has actually been very wise in that it has not overreacted to spikes in inflation that have proven to be (whisper it) transitory. Showing rates and inflation contemporaneously and without smoothing, one can see how the bond market shrugged off quite big spikes in inflation in, for example, 1990 (6.3 per cent) and 2011 (3.8 per cent) as well as the increase in inflation that coincided with the 2008 crisis:Of course the current inflation looks a lot more severe than any of those incidents. But they didn’t include global pandemics to deal with, either. One good readMiami gonna Miami. More

A crucial trade route between Canada and the US has been reopened following a weeklong-protest by lorry drivers and anti-lockdown demonstrators as police moved to clear the disruption.The Ambassador Bridge, the busiest border crossing in North America that connects Windsor, Ontario and Detroit, Michigan, had been closed by a group of anti-vaccine mandate protesters. Detroit International Bridge Co, the bridge’s owner, said on Sunday it was “fully open allowing the free flow of commerce”, according to the Associated Press. The protesters are part of the self-styled “Freedom Convoy” that has occupied Ottawa, Canada’s capital, for two weeks. What began as a narrow demonstration against a requirement that truck drivers crossing the Canada-US border be vaccinated against Covid-19 has swelled into a vast, foreign-funded anti-government protest. Drew Dilkens, the mayor of Windsor, said: “This is no longer just about vaccine mandates and mask mandates, this is more to do with an anti-government protest and it is leaderless.” Justin Trudeau, Canada’s centre-left prime minister, has become the main target of the protesters’ anger. His office said on Sunday that the Royal Canadian Mounted Police had established a co-ordinated command centre with provincial and municipal law enforcement to deal with the demonstrations, and warned that “consequences for breaking the law will be increasingly severe”.As well as blocking Ambassador Bridge, the protesters have laid siege to Ottawa and clogged traffic at another border crossing in Coutts, Alberta. The Freedom Convoy does not have the support of trade unions representing truckers.On Friday, a judge ordered an end to the blockade, while Doug Ford, premier of Ontario, declared a state of emergency, threatening those that blocked roads and bridges with C$100,000 (US$79,000) fines and a year in jail. Police intervened on Saturday morning after the court-mandated deadline of 7pm on Friday had passed.Yet police said 4,000 demonstrators had massed in Ottawa on Saturday, many dressed in camouflage, and marched through residential neighbourhoods waving flags and chanting “Freedom”. Police stood by as protesters removed barricades at Ottawa’s National War Memorial, which had been installed after people urinated on it and danced on the Tomb of the Unknown Soldier during the protest’s first weekend.“This isn’t just Ottawa, it’s the nation’s capital. But no one — not the city, the province, or the federal government — can seem to get their act together to end this illegal occupation,” Catherine McKenna, a former cabinet minister in Trudeau’s government, wrote in a social media post.Ambassador Bridge supports more than a quarter of trade between Canada and the US, accounting for C$400mn of daily trade, according to Dilkens.The blockade has prompted concern from the White House about supply chain disruptions. Last week, US president Joe Biden asked Canada to use federal powers to end the blockade, but Trudeau said he was not considering deploying the army.

Manufacturers have already suffered supply chain interruptions. Ford, the second-largest US carmaker, said on Friday that it had stopped work at its Ohio assembly plant, while Toyota and General Motors announced production cuts. The White House said on Sunday it was working closely with the Canadian government to help clear blockades on crossings between the countries and expected the Ambassador Bridge to reopen later in the day.Thousands of anti-vaccine mandate protesters descended on Ottawa at the end of January, when about 400 trucks blocked streets in front of parliament for a fortnight. The protesters erected a stage, a screen, a bar tent, kitchens, bouncy castles and a hot tub. The hooting of vehicle horns has continued despite an injunction issued by a judge last week.The protests have won the backing of high-profile figures on the US right wing, including former president Donald Trump, and inspired similar actions in France, New Zealand, the US and Australia.Additional reporting by Kiran Stacey in Washington More

The writer is chair of Rockefeller InternationalA hot spurt for global growth is generating breathless headlines. India is on pace to be “the world’s fastest growing large economy” and France is posting its “strongest growth in 52 years”. President Joe Biden cites the latest quarterly growth data as evidence that the US economy is growing “faster than China’s” for the first time in two decades and is “finally building an American economy for the 21st century”. Alas, 2021 looked so good only because so many economies contracted sharply the year before. This bounceback blip says nothing about the 21st century. The question is how fast economies can grow after the pandemic, once base effects fade and stimulus recedes. Trends in demographics and productivity suggest the global economy is likely to grow even more slowly in the 2020s than it did last decade.A brief history shows why. After the second world war, the baby boom nearly doubled global population growth to 2 per cent, a historic high. Productivity growth tripled to around 2 per cent, boosted by new technologies and a massive investment boom. With more workers, each producing more, global gross domestic product growth also doubled to an unprecedented level, close to 4 per cent. The postwar miracle was in full swing by the 1950s.In the 1980s, cracks appeared. Population growth ebbed as fertility rates declined. Productivity growth started to slow, for a number of hotly debated reasons. But new forces emerged to keep the growth miracle era alive.First, a debt boom. With inflation under control, central banks could slash interest rates to record lows, while financial liberalisation allowed for much more lending and borrowing. Second, a new free-market consensus opened borders to trade, money, workers and, later, data. Juiced by debt and globalisation, global GDP kept growing at near 4 per cent.The financial crisis of 2008 marked a major turn. Flows of trade and people slowed; flows of money collapsed. Only data flows carried on growing. Burnt by the crisis, many households in the developed world cut back debt. While total debt continued to swell, driven by governments and corporations, it did so at a slower pace, providing a weaker boost to growth. Global productivity growth fell back towards 1 per cent, even as labour-saving digital technology continued to spread. With a predictable lag, falling birth rates started to cramp growth in the working population (aged 16 to 64), which has dropped from 1.5 per cent to about 1 per cent.That was why the global economy grew at barely more than 2.5 per cent a year in the 2010s — the slowest decadal pace in postwar history. The four “Ds” — depopulation, declining productivity, deglobalisation and debt — all weighed on growth. The pandemic has only magnified those factors.The virus triggered a baby bust, a migration bust and a wave of retirement and quitting that is adding to the pressures of depopulation on growth. Though productivity typically surges early in a recovery, this time it continued to languish in many economies. Major powers from the US to China are turning further inward, extolling “self-sufficiency” over globalisation.As governments spent heavily to counter national lockdowns, debt levels hit new highs. But now, as interest rates head higher, borrowers of all kinds will be reluctant to take on more debt to fuel growth. The deepening impact of the four Ds suggests the trend towards slower growth will continue.No country is an island, isolated from these global trends. All need to reconsider how fast they can grow in the new era. High-income countries such as the US that still aim for 3 per cent annual growth will be lucky to top 2 per cent in this decade. Lower-income nations such as India need to lower their benchmark for success from 7 per cent to 5 per cent or better.Complicating this picture is that inflation has returned, driven by temporary supply shortages and heavy stimulus, but likely to be sustained by shrinking labour forces and rising wages. With inflation back, policymakers will no longer feel empowered to keep growth alive with constant doses of stimulus. Investors, who have grown accustomed to central banks propping up markets at the first sign of trouble, will need to wean themselves off the comforts of constant state support. Rather than hyping a temporary spike in growth data, it is time to recognise that a post-pandemic world shaped by the four Ds is likely to result in even slower growth and higher inflation.   More