Goldman sees crypto, credit shadowing robust 2018 US economy

(iStock)
(iStock)

New York - Financial imbalances including those in credit markets and cryptocurrencies will shadow an otherwise robust 2018 US economy, says Goldman Sachs economist Jan Hatzius.

Hatzius has already made some predictions for the new year: four Federal Reserve rate hikes, real US gross-domestic product growth quickening to an average of 2.6%, the jobless rate dropping to about 3.5%, and the yield curve not inverting.

In a new report, Hatzius reiterated his expectation for overall economic strength, while flagging some concerns.

“Asset valuations in some areas - especially credit - have risen to high levels by historical standards,” Hatzius said in the “10 Questions for 2018” report issued late on Friday.

“While we have not seen the type of large credit expansions that would be most worrisome for Fed officials concerned about financial imbalances, there are now some signs of speculative behaviour in financial markets, for example the cryptocurrency boom.”

Goldman isn’t the only firm to send up a warning flag about cryptocurrencies. JPMorgan Chase CEO Jamie Dimon labelled bitcoin a “ fraud”. Fed Chair Janet Yellen has said it is a “ highly speculative asset”, and Bank of Japan Governor Haruhiko Kuroda said it’s being used for speculation. 

Tax

On the positive side of the economic ledger, according to Hatzius: Single-family housing starts will rise further as the supply-demand imbalance continues to tighten, despite adverse changes from tax legislation signed into law by President Donald Trump.

US wage growth will resume acceleration as statistical distortions fade, and there’s “evidence that upper-income households have been trying to defer income in the hope of lower tax rates”, which could have held back some wage data until now, Hatzius said.

Core inflation will also accelerate from the current 1.5%, Hatzius said. Import prices weighing on the core personal consumption expenditures (PCE) could turn into a boost in the coming year, Also, “base effects” should help - such as when the weak March 2017 reading, which partially reflected mobile phone service-price measurements, drops out.

The Fed won’t adjust its balance-sheet normalisation plan either way, and market pricing of the terminal funds rate will rise as the Fed increases rates by more than currently priced, if markets view the additional tightening as appropriate, Hatzius said.

Still, as solid a picture as Goldman’s economist paints of the economic situation, the asset-valuation issue is seen as one to watch. And though the firm doesn’t see continued easing of financial conditions in 2018, it does view that as something that could alter the picture significantly.

Fed officials are “likely to view further easing of financial conditions as increasingly undesirable”, Hatzius said, “and an argument in its own right to normalise policy.”

“The economy is already at or slightly beyond full employment, growth momentum is strong, and a further boost from fiscal policy is already in the offing,” Hatzius said. “Adding more fuel to the fire via yet easier financial conditions looks undesirable.”

* Sign up to Fin24's top news in your inbox: SUBSCRIBE TO FIN24 NEWSLETTER

ZAR/USD
16.84
(-0.27)
ZAR/GBP
21.15
(+0.32)
ZAR/EUR
19.11
(-0.58)
ZAR/AUD
11.69
(-0.14)
ZAR/JPY
0.16
(+0.06)
Gold
1802.44
(+0.14)
Silver
19.07
(+1.63)
Platinum
826.18
(+0.59)
Brent Crude
43.02
(0.00)
Palladium
1965.00
(+0.71)
All Share
56199.46
(+1.41)
Top 40
51874.81
(+1.41)
Financial 15
10703.82
(+2.21)
Industrial 25
76910.63
(+1.02)
Resource 10
53327.86
(+1.61)
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Please select an option Oops! Something went wrong, please try again later.
Results
I'm not really directly affected
18% - 2004 votes
I am taking a hit, but should be able to recover in the next year
23% - 2621 votes
My finances have been devastated
35% - 3928 votes
It's still too early to know what the full effect will be
25% - 2810 votes
Vote