
No pain, no gain?
17 January 2025
4 minute read
Will Hobbs explores the potential trade-offs for economic growth and progress.
January’s pitch battle with festive fridge reflexes has an ultimate aim. If I (heroically) deny myself all of those tasty little morsels, maybe I can both wear last year’s clothes and breathe. Many see a similar trade-off at the level of the economy1 and markets.
This week’s article explores how this age-old framing of progress, personal or otherwise, may help us profit from an already jumpy start to the year for investors.
Necessary pain?
The US economy is the most obvious pin-up for those arguing in this direction. The incredible dynamism of the US comes at a giant cost – trends in mortality, morbidity and mental health in large tracts of the world’s richest society are perhaps illustrative.2 The pandemic provided further testament.
In Europe, policymakers encouraged businesses to retain staff through lockdowns and subsidised them accordingly. In the US, unemployment was allowed to rip (Figure 1), and financial support was sent directly to the individuals.
Figure 1: US initial jobless claims spiked in the pandemic

Source: Bloomberg, Barclays
Fast forward to today and the US gamble would appear to have paid off handsomely. The surge in private and public investment changed the economy and the jobs on offer with it. Many people rejoining the US workforce seem to have found jobs that fit better, resulting in a productivity boost. Others used the government checks to start-up businesses, resulting in an astonishing surge in new business formation that seems to have stuck.3
This is all-important as we enter the maelstrom of the next industrial revolution. There is no doubt that, for the new economy to repeatedly emerge, bits of the old one will have to be destroyed to make way. This will involve dislocation, disruption, and, if past is prologue, some may lose out permanently.4
Worse yet, the suffering can be both widespread and protracted. Some will rightly observe that the first century of the first industrial revolution inflicted a shocking, often fatal, cost for most, with a very narrow slice of society benefiting.
It wasn’t until the late 19th century that living standards picked up more broadly, a fact that began to register in incomes, diets and ultimately human heights.5 It is likely no coincidence that this welcome development followed a battery of improvements to the social safety net and to the provision of public goods, such as sewers.
However, the question posed by the current moment is where necessary support ends and growth-muffling mollycoddling begins? The answer will be different from economy to economy. We can glance covetously at other models of course, but we must be realistic as to a price to pay.
Bond market tantrum
No pain, no gain is also the guiding principle for many investors’ understanding of capital markets. How else are we to make sense of the jumble of price and return moves offered in the past? If there wasn’t such a relationship, why would anyone lend to a precarious government or own a lower quality company? Such riskier investments tend to offer higher returns as (approximately) commensurate incentive.
Of course, prospective risk is not an easy concept to measure. Price volatility is a very rough, and sometimes disingenuous, shorthand. There are no risk-free investments. Even if US government default is extremely unlikely, it is not impossible under all conditions.
Before the contortions of the pandemic, bond investors didn’t worry about compensation for the risk of inflation. After the inflation spike, this has become an important prospective risk to factor into yields.
At the heart of a so-far mild tantrum from the world’s bond investors is continuing US economic strength. As suggested above, inflation is also no longer a dimly remembered threat either.
Nonetheless, the more important factor so far is that the trend in real economic growth in the US looks sustainably brisker. This is driving a reassessment of interest rates across all maturities by investors reluctantly shedding their post-Great Financial Crisis playbooks.
The ripples from this re-pricing are currently being most visibly felt in the UK, where memories of the brief market melee under former Prime Minister Truss’ short-lived premiership remain fresh.
It is certainly possible for markets to become more disorderly yet. However, for the moment, we would point out that the UK economy is likely in better health than feared, in spite of some soggier data in the last few months.
The UK’s obituarists are likely too focused on the messages of the last decade, a period of subdued productivity growth globally and successive shocks for Europe in particular. In any case, the translation of interest rates to economic activity is fuzzier and less mechanical than the doomers require, as the experience of the last couple of years pays ready testament.
Investment conclusion
The current economic and geopolitical backdrop is as muddling as ever. Among the many calamitous paths inevitably fetishised by the media are many benign futures, characterised by solid productivity gains and maybe even fewer conflicts around the world. Well diversified investment exposure to the world economy likely remains your best ally.