Economic Survey identifies 3 sources of macrofinance risks in advanced economies

The Economic Survey 2017-18 has emphasised that apart from usual geo-political and geo-economic risks, the main risks lying on the macrofinance front in advanced economies stem from three inter-related sources like asset valuations, interest rates and bond and equity prices.

According to the survey tabled in Parliament on Monday by Finance Minister Arun Jaitley, asset valuations (price-equity ratios) have a greater risk of sharp corrections, the faster and higher they climb in the economic cycle.

"Simultaneously high valuations of both bonds and equities tend to be briefly lived because they suffer from an acute tension: if future earnings and economic growth are so bright, justifying high equity prices, interest rates cannot be forever so low," the Survey highlighted.

"If interest rates rise -- or if markets even sense that central banks will need to shift their stance -- both bond and equity prices could correct sharply," it added.

The Survey explained that even if asset prices correct, the impact on growth would be far smaller than it was in 2007-09, because advanced countries are far less vulnerable now than they were a decade ago.

However, according to the Survey, there would be some consequences like forcing advanced country consumers to cut back on their spending due to a large decline in wealth, which in turn would lead firms to curtail their investments.

"And if this happens, monetary and fiscal policies would have much less room for expansionary manoeuvre since interest rates are already low while government debts are high," the Survey said.

It added that there could also be significant political implications of the decline in asset prices.

--IANS

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