Tags: Goldman | risk | economy | US

Goldman Sachs: Risks Abound for 2014

Friday, 10 Jan 2014 07:22 AM

By Michael Kling

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Goldman Sachs is optimistic about 2014, but economic and financial pitfalls could prove its sanguine forecasts wrong, it warns.

"Our economic and market views for 2014 are quite upbeat," states Goldman's Dominic Wilson in a new report, according to ZeroHedge.

"After significant equity gains in 2013 and with more of a consensus that U.S. growth will improve, it is important to think about the risks to that view."

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Wilson cites five top economic risks in the report titled Where we worry: Risks to our outlook."

1. The reduction of fiscal drag could be less than expected. The fiscal drag last year might have been smaller than the firm thought, which would limit the upside for this year, or Goldman's assumptions about current fiscal plans going forward could be to optimistic.

2. Deleveraging obstacles continue to weigh on private demand. Spending may fail to accelerate, and rising mortgage rates could smother the housing recovery.

3. Less effective spare capacity could prompt inflation pressure. Wage inflation has been muted so far. "But the question of where capacity pressures begin to bite is always highly uncertain and is likely to be put to a tougher test as growth picks up," Wilson states.

4. Euro area problems could return. The situation has improved somewhat, but progress has been uneven and remains incomplete. The euro area faces "an uphill battle" due to low nominal GDP and domestic demand, he comments.

5. China poses a risk due to monetary tightening and high levels of debt.

Goldman also sees market risks.

Long-term yields may rise sharply if predictions for the Fed funds rate and inflation prove inaccurate.

In addition, markets could doubt the central bankers' commitment to easy money policies in the face of better growth, low premiums for risk could create valuation challenges corporate margins could come under pressure as wages recover and emerging markets could face challenges.

According to research and consulting firm Eurasia Group, geopolitical concerns pose the major risks for 2014. "There are tensions between China and Japan in the East China Sea, elite-level executions in North Korea, Russia flexing its muscles in neighboring Ukraine and beyond and everyone fighting with everyone else in the Middle East," the firm states in its Top Risks of 2014 report.

"All of which is changing the geopolitical map quite aside from the role of the world’s only superpower."

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