According to a widely followed Goldman Sachs index, global financial conditions have reached their tightest since May 2009, indicating a possible global economic slowdown.
Financial conditions reflect the availability of funding in an economy and are closely monitored by central bankers because they are thought to be strongly correlated with future growth. Businesses and households’ spending, saving, and investment plans are dictated by how loose or tight they are.
Goldman’s index rose to 100.92 points on Thursday, 130 basis points tighter than before Russia’s invasion of Ukraine on February 24.
Emerging market conditions reached their tightest since December 2008, at 102.47 points, a 230 basis point move since the invasion.
According to a widely followed Goldman Sachs index, global financial conditions have reached their tightest since May 2009, indicating a possible global economic slowdown.
The data showed that Russian conditions are at their tightest on record, at 128.83 points, up from around 98 at the start of February, the tightest on record in data dating back to 2007.
The tightening is an unwelcome development for a global economy already under pressure from rising commodity prices and supply chain disruptions.
Goldman Sachs, which compiles the most widely used financial conditions indexes using metrics such as exchange rates, equity swings, and borrowing costs, has previously shown that a 100-basis-point tightening in conditions crimps growth by one percentage point in the coming year.
Rabobank’s head of rates strategy, Richard McGuire, expects conditions to tighten further.
“Central banks are focused on inflation rather than growth, so any hope of a conciliatory stance reflecting weakening demand is likely to be disappointed,” he said.
On Thursday, the European Central Bank surprised markets by announcing plans to end its bond purchases in the third quarter, paving the way for rate hikes. Given the economic damage caused by the Ukraine crisis, many investors expected it to avoid making firm commitments.
Commodity importers such as China, Turkey, Korea, Japan, and India may be hit the hardest by price pressures caused by Russian sanctions, according to ratings agency Moody’s.
“You have to brace yourself for demand destruction, either delivered by central banks, which tightens financial conditions, or via eroded profit margins, which leads to negative real income growth in the absence of central bank growth,” McGuire said.
This could lead to further market selloffs, which would be another channel through which conditions tighten, he added.
None of the metrics Goldman monitors indicate relief. The dollar is near two-year highs, global stocks have fallen more than 10% this year, and corporate borrowing costs have risen sharply as investors assess the impact on profits.
Source: Reuters
