The continued surge in market interest rates will become an increasing headwind for the economy, especially next year when the boost from fiscal stimulus fades. Admittedly, the level of interest rates remains low by historical standards. But the change has been more worrying. In real terms, the 2-year Treasury yield has risen by 150bp over the past three years. That is similar to the increases seen prior to the past five recessions. For now, that increase in interest rates is not preventing economic growth from rebounding, with the April retail sales and industrial production data both signalling a decent pick-up in growth. The latest business surveys are consistent with GDP growth rising above 3% annualised in the second quarter, from 2.3% in the first quarter.
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