FXStreet (Delhi) – Research Team at Goldman Sachs, suggests that there are two main risks facing the global economy: 1) a large and sudden dollar appreciation, perhaps driven by more aggressive Fed tightening and potentially involving a significant tightening in US financial conditions, and 2) a bigger downturn in China, potentially including a one-off renminbi devaluation and a sizable tightening in domestic financial conditions. Key Quotes “Our simulations suggest that US growth slows by about 0.5pp in the benign scenario while Chinese growth slows almost twice as much—given its peg to the stronger dollar and the greater sensitivity of exports to exchange rate changes. The Euro area and Japan receive a 0.2-0.3pp growth boost due to the depreciation of their currencies. In the adverse dollar appreciation scenario, US growth slows more sharply and the tightening in financial conditions spill over into the rest of the world, almost offsetting the currency boosts to growth in Europe and Japan. The appreciation weighs notably on core inflation in the US and China but provides a small boost to the Euro area and Japan.” “By construction, both scenarios involve a meaningful slowdown in Chinese GDP growth. The spillovers into real GDP in advanced economies, however, are quite small unless Chinese financial conditions tighten significantly. Our results suggest that spillovers into Japan are likely to be larger than those for the US and the Euro area. The inflation spillovers are negligible in the benign scenario and small (around 5bp) in the adverse scenario.” For more information, read our latest forex news.