Global financial conditions have reached their tightest since May 2009, according to a widely regarded Goldman Sachs index, which might indicate a global economic slowdown.
The financial circumstances of an economy represent the availability of capital in that economy, and they are thought to have a high association with future growth. Central banks are likewise keeping a close eye on them. The amount of looseness or tightness of financial circumstances dictates the spending, saving, and investing intentions of firms and people.
As of Thursday this week, Goldman’s index has risen to 100.92 points, a 130 basis point improvement above where it was before Russia’s invasion of Ukraine on February 24.
According to Goldman Sachs, the tightness value for developing market financial conditions was 102.47 points, the most since 2008 and up 230 basis points from the period before the Ukraine crisis.
Financial circumstances in Russia are likewise at its tightest in history, with a score of 128.83 points, up from 98 at the start of February – already the highest for the country since the index was founded and records were started in 2007.
Financial conditions tightening is an unwelcome prospect for the global economy, which is already under strain due to rising commodity prices and supply chain disruptions.
Goldman Sachs has previously established that a 100-basis-point tightening of financial conditions reduces GDP by one percentage point the following year, using variables such as currency rates, market movements, and borrowing costs.
Richard McGuire, director of rates strategy at Rabobank, believes conditions will tighten much further.
“Central banks are focused on inflation rather than growth so any hope of a conciliatory stance reflective of the fact that demand is weakening is likely to be disappointed,” he said.
The European Central Bank stated on Thursday that it will end its bond purchases in the third quarter, paving the way for interest rate rises – an announcement that stunned thee markets. Because of the economic consequences of the Ukraine crisis, many investors expected the ECB to hold off on making large commitments.
Commodity importers such as China, Turkey, Korea, Japan, and India, according to Moody’s, may be the worst hit by pricing pressures resulting from Russian sanctions.
“You have to brace yourself for demand destruction either delivered by central banks, which in itself tightens financial conditions, or via eroded profit margins, negative real income growth without central bank growth,” McGuire said.
He believes that this might lead to additional stock selloffs, which would tighten the situation further.
Any of Goldman’s metrics don’t monitor signal reduction. The dollar is approaching two-year highs, overseas shares are down more than 10% this year, and corporate borrowing rates are much higher as investors assess the damage to profitability.
(Adapted from EconomicTimes.com)