Graph-Tightening fiscal conditions to watch out for the global economy

Reuters |

By Yoruk Bahceli

March 9 (Reuters)-Rising energy prices, falling stock markets, and market turmoil caused by Russia’s invasion of Ukraine have put the global financial situation under unprecedented stress since early 2016.

The financial position, which reflects the potential for financing the economy, is closely monitored by the central bank. Central bank evolution impacts household and corporate spending, investment and savings and is therefore strongly correlated with future growth.

Incorporating variables such as exchange rates, stock prices, and credit costs into its widely used index calculations, Goldman Sachs has in the past tightened its fiscal position by 100 basis points, reducing growth by 1 percentage point over the year. I showed you to do it. Correlation is also valid in the opposite direction.

Continued tightening is at a bad time for the global economy, despite the still very accommodative bias in monetary policy, as recovery has already been threatened by the effects of rising energy prices, such as supply chain turmoil. ..

Goldman Sachs’ Financial Status Index (FCI) closed at 100.7 points on Tuesday at February 2016 levels. This is equivalent to a tightening of 70 basis points compared to the long-term average and 110 points from the pre-invasion level of Ukraine. ..

This increase was mainly due to the depreciation of the ruble and the doubling of interest rates, which caused the local FCI index to jump from 98 to 123 at the beginning of February, the highest level ever, in Russia’s financial position. This is due to the fact that it has become stricter.

DZ Bank’s chief strategy officer, Rene Albrecht, said the current dynamic inflation would accelerate and “if the central bank takes its mission seriously”, the financial situation would be even tougher.

“Economic dynamics continue to slow, inflation remains high, the effects of the second round are seen, followed by stagflation scenarios,” he explained, referring to the relationship between high inflation and growth. To do.

This mechanism can be particularly painful for certain emerging markets.

Thus, rating agency Moody’s said in a recent study, “Pressures on raw material prices will probably lead to currency depreciation and rising inflation due to import inflation in certain emerging economies, which in turn will tighten fiscal conditions. I estimated. Low growth. “

“The extent of the impact on the countries involved depends on their status as a net importer or exporter of raw materials,” Moody’s added, expecting importers from China, Turkey, South Korea, Japan, India and Indonesia. ing. Most affected.

The euro area, which relies heavily on Russia for its energy supply, has also been exposed since November 2020 due to the less severe financial situation.

The regional fiscal index has risen 60 basis points since the beginning of February, partly due to changes in the European Central Bank’s (ECB) rhetoric, which opened the door to rate hikes on February 3.

The ECB is expected to clarify its intentions Thursday after the second monetary policy meeting this year, taking into account the impact of the conflict in Ukraine on economic activity and prices.

As planned before the aggression, tightening eurozone fiscal conditions could return to the level of the beginning of a pandemic if the choice to gradually reduce asset purchases in the market and then raise interest rates is maintained. Viraj Patel, a macro strategist at Vanda Research, even talks about the debt crisis 10 years ago.

(Reported by York Bahceli, Sujata Rao, Marc Jones, Jamie McGeever, French version of Marc Angrand, Jean-Michel BĂ©lot)