Tighter financial conditions sound alarm bells for the global economy


  • Russian financial conditions at lowest since 2008
  • Global financial conditions are at their highest since the peak of the pandemic
  • Conditions could tighten further if inflation continues to rise

March 8 (Reuters) – Global financial conditions, seen as strongly correlated with future growth, are at their highest in two years, due to soaring energy prices, falling stocks and conflict fallout Ukraine-Russia.

Financial conditions are the umbrella term describing how measures such as exchange rates, equity fluctuations, and borrowing costs affect the availability of financing in the economy.

The degree to which conditions are eased or tightened dictates the spending, saving and investment plans of businesses and households.

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Goldman Sachs, which compiles the most widely used financial conditions indices, has in the past shown 100 basis point growth in tightening crimps of one percentage point over the coming year, an equivalent easing giving a corresponding boost.

The tightening is an unwanted development for a global economy already threatened by the fallout from oil prices at $120 a barrel and supply chain setbacks caused by sanctions on Russia.

GS Global Financial Terms

If these push 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.

Goldman Sachs’ Global Financial Conditions Index (FCI) is at 100.2, 60 basis points (bps) higher than before Russia’s invasion of Ukraine and a level last seen in March 2020 when the pandemic first hit.

The rise was led by its Russian FCI, which hit 114.8 from around 98 in early February to the tightest since the 2008 crisis, driven by a doubling in interest rates and a market implosion.

The Russian move pushed an emerging markets FCI to the highest since 2016.

Financial terms of GS Russia

Movements in the Eurozone are also important. Conditions in the bloc, heavily dependent on Russian energy, are at their highest since November 2020, having moved 50 basis points in February, also spurred on by the European Central Bank (ECB) opening the door to rate hikes this year.

Viraj Patel, global macro strategist at Vanda Research, said financial conditions will take on even more importance for the ECB, which meets on Thursday.

If he unwinds bond purchases followed by rate hikes as planned before the invasion, financial conditions could tighten to levels seen at the height of the pandemic or even the bloc’s sovereign debt crisis. ten years ago, he added.

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

But the indicators Goldman uses to calculate its indices are not signaling any relief; safe-haven flows are boosting the US dollar, which is near a two-year high, and global equities have fallen 11% this year, led by a nearly 20% drop in eurozone stocks.

Risk premia for investment-grade U.S. corporate bonds have risen 40 basis points year-to-date as investors weigh the impact on corporate earnings.

With historically loose conditions in developed markets, policymakers may not yet be too perturbed. On an inflation-adjusted basis, borrowing costs fell sharply, hitting a record high of -2.5% in Germany on Monday.

Peter Chatwell, head of multi-asset strategy at Mizuho, ​​said it gives central banks “more space to speak belligerently and for those who are about to act belligerently, to act belligerently”.

Euro area financial conditions GS
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Reporting by Yoruk Bahceli Additional reporting and editing by Sujata Rao and Mark Potter

Our standards: The Thomson Reuters Trust Principles.

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