A recent Global Economics Weekly report from Jim O’Neil and the team at Goldman Sachs Global Economics highlights the answers to seven key questions that, according to them, should provide an indication of whether the improvement in the global economy and performance of world financial markets can be sustained.

1. Will leading indicators, as highlighted by our own GLI, continue to improve?
Will leading economic indicators continue to improve? We capture a wide variety of global data through our global leading indicator (GLI) and the GLI continues to show strong upward momentum. The GLI should lead the economy by a few months and we therefore are still optimistic about the coming months. As a result we have upgraded our economic forecasts for global GDP growth to 4% driven by improved (less bad) forecasts for the US, Europe and Japan.

2. Are the better signs in the US housing market likely to persist?
One of the sources of this crisis seems to have bottomed. The Case-Shiller house price index rose 0.75% in June, the 1^st rise since May 2006.

3. What will tighter financial conditions in China do to growth?
Chinese policymakers have indicated they may want to slow the pace of lending and tighten financial conditions, but so far we see no evidence in the data for this.

4. Will Chinese import growth continue to accelerate relative to exports?
Import growth in China has been stronger than export growth. Popular wisdom holds that China only exports. It may be possible that China does have domestic demand and may play a role in the global economic recovery and the rebalancing of the world’s imbalances.

5. Is the recent positive surprise in Euro-area activity a one-off, or is it set to continue?
Europe, particularly Germany and France, surprised on the upside in the 2^nd quarter. Looking at the breakdown of German GDP, we noted a 2^nd quarter of positive personal consumption, something we believed Germans didn’t do. German forward looking surveys (e.g. PMI, IFO) continue to surprise on the upside, so the Q3 data should be an important item to monitor to see how the Eurozone as a whole will develop.

6. Will inflation continue to behave, despite improving growth and accommodative policies?
As we have argued many times, we don’t believe inflation to be a significant threat in the near term. There is too much spare capacity for inflation to really take hold. Monitoring inflation data should confirm this view.

7. When will policymakers withdraw the stimulus?
Investors are starting to get concerned about exit policies. We believe that policymakers will only start withdrawing stimulus measures once they perceive that their economies can sustain growth without their help. Only if we continue to see significant surprises on the upside, will they start earlier than we forecast now. This would however be a change of strategy for positive reasons. We believe also that the private sector will return at a certain point and that the world will be able to survive without government support.

The Goldman team concludes: “Based on our latest forecasts and recommended trading strategies, we expect equity markets and other risky assets to continue to perform generally well as we move into the final third of the year.”

Source: Goldman Sachs, September 2, 2009.

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