Tighter financial conditions sound alarm bells for the global economy

  • The toughest Russian financial conditions on record
  • Global financial conditions at lowest since 2016
  • Conditions could tighten further if inflation picks up

March 9 (Reuters) – Global financial conditions are at their highest since the start of 2016, driven by soaring energy prices, falling equities and market turmoil stemming from the invasion of the Ukraine by Russia.

Financial conditions reflect the availability of finance in an economy and, seen to be strongly correlated to future growth, are closely watched by central bankers. How loose or tight they dictate the spending, saving and investment plans of businesses and households.

Goldman Sachs, which uses measures such as exchange rates, stock moves and borrowing costs to compile the most widely used indices of financial conditions, has in the past shown that a 100 basis point tightening conditions slows growth by one percentage point in the coming year. , with an equivalent release giving a corresponding boost.

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The current tightening is an unwelcome development for a global economy which, despite historically loose monetary conditions in developed markets, is already threatened by the ripple effect of oil prices above $120 a barrel and setbacks in the supply chain caused by the sanctions against Russia. and the COVID-19 pandemic.

Goldman Sachs’ Global Financial Conditions Index (FCI) stood at 100.7 points at Tuesday’s close, a level last seen in February 2016 that is 70 basis points (bps) tighter than the long-term average of the index 100 points and 110 bps tighter than before the Russian invasion.

The rise was led by Russia’s FCI, which climbed to 123 from around 98 in early February, the tightest on record in data dating back to 2007, driven by the ruble losing a third of its value and a doubling in interest rates. interest. .

GS Global Financial Terms

“STAGFLATION SCENARIO”

If the current momentum pushes inflation steadily higher, and “if central banks take their mandates seriously, you will see a further (tightening) of financial conditions,” said Rene Albrecht, strategist at DZ Bank.

“Economic momentum will slow further, inflation will still be high and you will see second round effects and then you will get a scenario of stagflation,” he added, referring to a combination of rising inflation and slower economic growth.

The war in Ukraine has pushed an emerging markets FCI to its tightest level since 2009.

“Commodity price pressures will likely lead to currency depreciation and higher inflation, via imported inflation, in some emerging markets, which will tighten financial conditions and weaken growth,” rating agency Moody’s said in a recent report.

“The magnitude of the effects on individual countries will depend on whether they are net importers or exporters of commodities,” Moody’s said, expecting importers such as China, Turkey, Korea, Japan, India and Indonesia are the most affected.

Russian GS Financial Terms

Movements in the Eurozone are also important. Conditions in the bloc, heavily dependent on Russian energy, are at their highest since November 2020.

They have tightened by 60 basis points since the beginning of February, also pushed by the European Central Bank (ECB), which has opened the door to interest rate hikes this year. The ECB is expected to make as few policy commitments as possible at a meeting on Thursday while waiting to see how events unfold in Ukraine.

If he proceeds to unwind bond purchases followed by rate hikes, as expected before the invasion, financial conditions could tighten to levels seen at the height of the pandemic or even the sovereign debt crisis of the block a decade ago, Viraj Patel, global macro strategist at Vanda Research, said.

Conditions in the United States have tightened to a lesser extent.

The indicators Goldman uses to calculate its indexes are not signaling any relief.

Safe-haven flows boost the dollar, which is near two-year highs, global equities have fallen more than 12% this year and risk premia for high-quality US corporate bonds have widened by 50 basis points year-to-date as investors assess the hit to corporate earnings.

Euro area financial conditions GS
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Reporting by Yoruk Bahceli; additional reporting by Sujata Rao, Marc Jones and Jamie McGeever; edited by Sujata Rao

Our standards: The Thomson Reuters Trust Principles.

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