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No, the current stock market turmoil won’t derail the economy, says Goldman

Pullback in Hong Kong market is a short-term correction

PUBLISHED : Wednesday, 07 February, 2018, 7:33am
UPDATED : Wednesday, 07 February, 2018, 7:33am

Do not worry about the current stock market rout as monetary conditions are still positive for economic growth – that is Goldman Sach’s message after the carnage in global stocks on Monday and Tuesday.

Wall Street plummeted on Friday, setting off a global stock market rout. The Dow Jones Industrial Average has lost 1,841 points – or 7 per cent – in two sessions.

On Tuesday, Asian markets also plunged. Hong Kong’s Hang Seng Index fell by 1,649.8 points, or 5.1 per cent, to close at 30,595.42. Japan’s Nikkei 225 fell by 4.7 per cent, or 1,071.84 points.

“The turmoil is bigger in equity than in other asset classes. But I don’t think it will derail the economy,” Andrew Tilton, chief Asia-Pacific economist at the investment bank, said during a press conference in Hong Kong on Tuesday.

He said the pullback in the Hong Kong market was a short-term correction. “Given the equity market has gone up quite a lot previously, this pullback will not change our economic outlook significantly,” he said.

Hong Kong’s benchmark stock index plunges in panic selling as Asia follows US market rout

Tilton said he expected Asia to record above-trend growth in 2018, with China posting a slight deceleration but still growing at a strong 6.5 per cent, supported by export, consumption and infrastructure construction.

The Chinese government is expected to continue its policy tightening in the housing sector and shadow banking in 2018, while maintaining capital controls and anti-pollution measures.

The chance that China increases interest rates this year is small, as these tightening measures are negative for growth, he added.

The investment bank has forecast four rate increases by the US Federal Reserve in 2018 and 2019, respectively. Tilton said he expected Hong Kong to follow the rate moves in the United States sooner or later. “It’s quite likely that Hong Kong’s interest rates will move higher, as the US raises rates further this year.”

Hong Kong stocks join global tumble on Wall Street turbulence, but sentiment still positive

Given the equity market has gone up quite a lot previously, this pullback will not change our economic outlook significantly
Andrew Tilton, chief Asia-Pacific economist, Goldman Sachs

“Financial conditions have become tighter in the US, but are still positive,” said Jan Hatzius, chief economist for Goldman Sachs. When a central bank tightens or loosens its monetary policy, this affects a broad category of financial variables, such as treasury and bond-yield spreads, which then influence future economic activity.

Hatzius said the investment bank’s financial condition index, which moves up when conditions tighten, rose by 50 basis points last week, back to levels at the end of December. “But they are easier than one or two years ago, which will feed into growth.”

Still, the biggest fear of 2018 is the normalisation of monetary policy, said Hatzius. “If the process moves too quickly, it could slow growth sharply.”

Goldman has forecast the world economy to grow by 4.1 per cent in 2018, up by 0.3 percentage point from 2017. The US is forecast to expand by 2.7 per cent, up from last year’s 2.3 per cent.

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