The World is Down, But Far From Out

- "Welcome to our first Global Economics Weekly after the August break. We return to discuss the state of the world economy, our forecasts and our views on markets for the remainder of the year and beyond. During August, we saw unequivocal evidence of a significant slowdown in the US economy and, together with the already clear evidence of some earlier slowing in China, this has reawakened familiar fears for financial market participants. That said, we pinpoint here some key factors that should limit the downside for equities and other ‘risky’ assets."
- "Although the US economy will probably struggle for a number of quarters, we still think that a full-blow recession is not the most likely outcome. Moreover, US financial conditions are more important than the US economy for the rest of the world, and so the US policy response to the US economy’s ongoing sub-trend performance is more important than the US economy itself. If the economy performs as we forecast, we would expect fresh steps from the Federal Reserve to ease financial conditions."
- "In China, we expect further evidence of softening GDP growth but, in contrast to the US, this slowdown has been deliberately induced by tightening financial conditions. The evidence in recent weeks suggests that Beijing is moving to reverse these steps now that they have brought inflationary pressures under control. We forecast renewed strength in Chinese GDP growth in 2011, led by domestic demand."
- "Against a background of reasonable valuations and rather high equity risk premia, we think that once markets realise that the US is not likely to enter a full-blown recession and that China is going to strengthen, equity markets and risky assets in general will rally."

GoldmanSachs Global Economics Weekly 20100901

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