Goldman Sachs says relax: Global growth is still on track

Key Points
  • Markets sold off sharply on Friday following poor German data.
  • The yield curve inverted for the first time in more than a decade.
  • Goldman Sachs says despite bearish data, global growth is still on track.
Wall Street set for flat open amid global economic uncertainty

The risk of a major slowdown to the German and Chinese economies are overblown and global risk assets still look attractive, according to economists at Goldman Sachs.

The investment bank claimed in a note to clients Sunday that there was a "bright picture" for perceived riskier investments if near term events such as Brexit and the U.S.-China trade war can be successfully negotiated.

Markets sold off sharply Friday after poor German data set in motion a consensus that a global slowdown was imminent. The spread between the three-month U.S. Treasury bill and the 10-year note turned negative on Friday — the first time this has happened in more than a decade. Investors consider this to be a signal that a recession may be coming.

That bearish bond move sent equities tumbling but the weekend message from Goldman is to keep calm.

"We think this is a major overreaction," said Goldman economists Jan Hatzius and Sven Jari Stehn in the note.

"For one thing the German manufacturing index was an outlier among European PMIs (Purchasing Managers' Index), in particular the service sector readings looked fine in Germany and elsewhere in the euro area."

The economists added that while pressure on German manufacturing was valid, easy fiscal conditions and a strong labor market pointed to a coming upturn in fortunes.

On China, Goldman said its Current Activity Indicator (CAI) was showing a 2019 pick-up for the world's second-largest economy and that decent PMI figures for March, due next weekend, would increase confidence that "the worst in global growth is behind us."

Hatzius and Stehn were particularly bullish on the United States' prospects. While Goldman forecasts U.S. real GDP (when adjusted for inflation) for the first quarter to be just 0.7 percent, it then predicts a big jump back to 3 percent for the second quarter.

The analysts put the sudden change down to the end of the government shutdown, seasonal factors as well as an improvement in the underlying picture. The note was released too early to consider any impact of the Mueller report's findings.

The Goldman duo admitted that their relaxed view is based on a relatively speedy resolution to Brexit and the ongoing trade negotiations between China and the United States. Goldman have made the case that Brexit could well end up with Britain remaining in a customs union and that President Donald Trump and President Xi Jinping will sign a deal "within the next few months."

On strategy, Goldman said it had eased back from positive views on "economically sensitive assets" across stocks, emerging market bonds and currencies, and commodities.

However, the bank said this was in part due to a recent punchy run in those areas and the picture for risk assets remained "quite bright in an environment of gradually stronger global growth."