Expectations for Economic Recovery in the Second Half Materialize... Stock Market Volatility Expected to Increase

Four Policy Risks Remain... Inflation, Monetary Policy, Tax Increase, US-China Conflict

[Image source=Yonhap News]

[Asia Economy Reporter Gong Byung-sun] As expectations for economic recovery in the second half of this year materialize, an analysis suggests that volatility in the financial markets will expand. While the real economy’s recovery trend remains valid, liquidity conditions are expected to weaken whenever policy risks come to the forefront.

On the 15th, Shinhan Investment Corp. predicted that economic recovery will be realized from the second half of the year, while policy risks will resurface. Ha Geon-hyeong, a researcher at Shinhan Investment Corp., said, “Since the beginning of this year, expectations for economic recovery have already risen due to vaccine distribution and aggressive fiscal expansion policies,” adding, “As economic normalization takes place, fiscal expansion in advanced countries will lead not only to recovery but also to temporary overheating.”

From the real economy perspective, shocks are expected to be minimal. This is because strong household purchasing power offsets the side effects of inflation. Researcher Ha explained, “In the past, during phases of monetary policy normalization, the real economy’s recovery trend was robust,” and added, “Tax increases will also be accompanied by fiscal expansion, sustaining demand creation effects.”

The dispute between the US and China (G2) is also not expected to cause shocks to the real economy. There may be no contraction in trade due to the G2 dispute. Ha emphasized, “Unlike during the Donald Trump administration, China is expanding imports of US goods to fulfill trade agreements,” and “The US cannot replace imports of low-priced Chinese goods.”

However, policy risks are expected to exert influence in the second half of the year. First, rapid inflation is mentioned. Rising prices could lead to a deterioration in purchasing power, suppressing demand or triggering concerns about interest rate hikes and early monetary policy normalization. Monetary policy normalization regarding the timing of asset purchases (tapering) and interest rate increases is also identified as a policy risk. Additionally, tax increases and renewed tensions between the US and China may escalate again.

Accordingly, Shinhan Investment Corp. predicts that while the financial market’s direction will be maintained, increased volatility is inevitable. The stock market may fluctuate whenever the aforementioned policy risks emerge. Researcher Ha explained, “Due to inflation debates, attempts at monetary policy normalization, and tax increases, liquidity conditions may weaken.”