A Big De­cline in Mar­kets Could Hit Global Econ­omy

A 10% fall in global mar­kets could wipe off as much as 0.3% growth, says a study

The Economic Times - - Companies: Pursuit Of Profit -

Lon­don: There is a “sig­nif­i­cant pos­si­bil­ity” of a ma­jor stock mar­ket cor­rec­tion in the near fu­ture which could drag down global eco­nomic growth, ac­cord­ing to re­cent anal­y­sis from staff at re­search house Ox­ford Eco­nom­ics.

Writ­ing on Tues­day, Ox­ford’s global head of macro re­search Gabriel Sterne ar­gued that a 10% fall in global mar­kets, caused by a re­duc­tion in “ir­ra­tional ex­u­ber­ance,” could have the po­ten­tial to wipe as much as 0.3% off growth in ma­jor economies. “Given the ex­tent of over­val­u­a­tion cur­rently, a shock to mar­ket con­fi­dence — an end to ir­ra­tional ex­u­ber­ance — could lead to sharp price falls,” Sterne wrote in the note.

“But­there­are­al­so­more­fun­da­men­tal risks, in­clud­ing dis­ap­point­ing global growth, a re­ver­sal in lowfla­tion, a slow­down in China and fur­ther set­backs re­lated to Trump’s pol­icy ini­tia- tives.” It should also be noted that Ox­ford’s note was cir­cu­lated prior to the re­cent es­ca­la­tion of tensions be­tween the USA and North Korea, which has al­ready had a marked neg­a­tive im­pact on global sen­ti­ment.

Stocks around the world have ral­lied strongly dur­ing 2017, with all three ma­jor bench­marks in the USA fre­quently break­ing to new record highs this year. The pat­tern has been sim­i­lar in the UK, where in Jan­uary the FTSE 100 went on a streak of more than 10 days of con­sec­u­tive new highs. “Those days could be close to an end.”

“A 10% de­cline in equities trig­gered by a loss of mar­ket con­fi­dence would re­duce the level of both con­sump­tion and GDP on av­er­age by a lit­tle over 0.3% across ad­vanced economies, ac­cord­ing to our model sim­u­la­tions, with the peak im­pact oc­cur ring af­ter four to six quar­ters,” Sterne con­tin­ues.

“The im­pact is broadly in line with the in­tu­ition that the mag­ni­tude of the im­pact on con­sump­tion will be higher: (i) the more wealth con­sumers start with; and (ii) the sharper is con­sumers’ re­ac­tion to any given change in wealth.”

The im­pact, Ox­ford’s note ar­gued, would dif­fer be­tween economies, but it is likely that coun­tries with higher over­all mar­ket-cap would be the worst af­fected by the cor­rec­tion. “We would ex­pect that economies with very high stock mar­ket cap­i­tal­i­sa­tions (in­clud­ing the US and UK) would be more se­verely af­fected,” Sterne writes.

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