China at Midyear...Payor Pushback...Pokémon’s Augmented Reality

Insights on markets, industries and the global economy [Goldman Sachs] [BRIEFINGS] July 18, 2016 China at Midyear: Stimulus Peaking for Now No economy has been more heavily scrutinized than China's in 2016. Official statistics on second-quarter GDP last week showed growth of 6.7%, aided by government measures earlier in the year to stimulate growth. As we enter the second half of the year, Andrew Tilton, the chief Asia Pacific economist for Goldman Sachs Research, reviews how Chinese growth has weathered global volatility and the country's own efforts to refashion its economy, and why policymakers may re-emphasize reform efforts even at the expense of slightly slower growth. "The key question... is how will growth fare as government stimulus policies start to back off?" Around the world in 15 minutes: watch our [global], [US], [European] and [emerging market] outlooks. [Watch video] [Outlooks 2016] SHARE: [twitter] [facebook] [LinkedIn] [email] Healthcare's Balance Between Science and Commerce The latest innovations in the healthcare sector, including immuno-oncology, gene therapy and gene editing, have recently been overshadowed by a contentious debate about skyrocketing prices for some drugs. On our podcast, Exchanges at Goldman Sachs, Jami Rubin of Goldman Sachs Research says the uncertainty over how a new US Congress and administration would address the pricing issue is part of the reason why healthcare has been one of the poorest performers in the S&P 500 this year. More FDA approvals of generics will help, and so will an evolving push into biosimilars — essentially generics for biological drugs. But some of the most expensive drugs hold the most potential to save lives, and payors so far have not pushed back on pricing where survival data is clear. For medications that fail to match the performance of high-performing offerings like some immuno-oncology drugs, "it's going to be difficult to justify those high prices." [Listen to podcast] [Subscribe on iTunes] SHARE: [twitter] [facebook] [LinkedIn] [email] Briefly... on Europe's Latest Twist in Monetary Policy In June, the European Central Bank (ECB) stepped up its purchasing of financial assets to 80 billion euros per month and, for the first time, started to include Investment Grade nonfinancial corporate bonds in the mix. We sat down with Francesco Garzarelli, co-head of Global Macro Markets Research and European Economics in Goldman Sachs Research, to learn more about the "Corporate Sector Purchase Programme" (CSPP) and why the ECB is rolling out this unprecedented scheme. It's been over a year since the ECB started so-called quantitative easing to pump money into the economy, yet inflation is low and growth anemic. How would you assess the success of the program so far? Francesco Garzarelli: The policies that the ECB has sequentially put in place — specifically negative policy rates, long-term refinancing arrangements to help banks lower their costs of funding, and large-scale asset outright purchases of both public and private long-term securities — are supporting demand through lower and more homogenous funding terms across the currency area and an increase in net public spending that comes from smaller interest bills and lower public debt rollover needs. So far, we've seen Euro area real GDP expanding at a slightly above-trend rate, the unemployment rate progressively falling, and CPI inflation stabilizing around 1% when you exclude energy and food prices. Considering the headwinds to growth from ongoing deleveraging, structural reforms, and broader uncertainty, these are acceptable outcomes on the whole. Now, admittedly, the large and growing income inequalities across the region remain a pressing issue, but these problems can't be addressed with monetary policy. They require a further upgrade to Euro governance and fiscal institutions to be tackled effectively. Why did the ECB add corporate bonds to the mix of assets it buys? FG: There are three main reasons. First, to provide a matching asset on the ECB's balance sheet, allowing the expansion of money injections — a liability for the central bank — from 60 billion euros to 80 billion euros a month. Second, to achieve a more direct reduction in corporate borrowing terms at a time when banks are still rebuilding capital and less willing to expand lending. And third, to encourage an increase in the supply of corporate bonds, supporting the expansion of the debt capital market in a region where capital is still largely allocated through banks. Thus far, all three of these objectives are being met. Won't the negative yields resulting from this policy accommodation be detrimental for savers? FG: You've hit on a topic of intense debate in the academic community. Consider that in some New-Keynesian frameworks lower rates may actually depress inflation, rather than increase it. Amongst industry practitioners and most policymakers, there is consensus that frictions and contractual constraints are having negative effects — for instance on banks' margins, the life insurance business, or defined benefit pension plans. Whether these are more than offset by the support to debtors and a weaker exchange rate than otherwise would be the case is, for now at least, hard to say. Last Thursday, the Bank of England signaled that it will announce easing measures at its next policy meeting. How will the measures compare to what the ECB is doing and how are they intended to help the UK economy? FG: We expect a 25 basis point rate cut in August, validating what is already priced, alongside an expansion of the existing Funding-for-Lending Scheme beyond small and medium-sized businesses. We're also expecting the launch of outright purchases of financial assets — Gilts, corporate bonds and asset-backed securities — totaling around 100 billion pounds and spread over two to three quarters, though Gilt and corporate bonds were already part of the BoE's previous QE program. The policy statement released last Thursday referred to consideration being given to 'interactions with the financial system' in the calibration of the stimulus measures. This buttresses our view that the BoE will refrain from adopting measures that depress nominal interest rates too much in light of the negative impact this would have on banks, pension, and insurance companies. Cutting rates too deeply would also reinforce downward pressures on Sterling, which has already depreciated considerably helping net trade. The 'credit easing' we anticipate, instead, would complement a modest relaxation of the fiscal stance, buffering the 'uncertainty shock' from Brexit which is weighing on consumption and investment. Big Opportunities in Big Data Goldman Sachs Asset Management's (GSAM) seventh edition of GSAM Perspectives, Big Opportunities in Big Data, breaks down big data: what it is, why it matters and how it is reshaping the economic and financial landscape. New advancements — notably machine learning algorithms and natural language processing (NLP) — are making it easier for people and businesses to harness and apply big data's insights. Consider this: While global investors have long used computers to digest and analyze quantitative data, it has always been more challenging to quickly do the same with qualitative, text-based sources — encompassing hundreds of thousands of pages in annual reports, analyst research reports and more than 30,000 hours of earnings calls each year. NLP is helping to remove that limitation by converting millions of these unstructured data points into more accessible formats that can be quickly reviewed by analysts, allowing them to uncover important and often subtle investment insights. [Read more] SHARE: [twitter] [facebook] [LinkedIn] [email] Pokémon? Go Figure It turns out augmented reality technology is consumer-ready right now. Heather Bellini of Goldman Sachs Research considers what Pokémon Go's instant success means for the broader push to make virtual and augmented reality the next big computing platform. [Watch video] SHARE: [twitter] [facebook] [LinkedIn] [email] Goldman Sachs Media Highlights CNBC - July 12 [David Kostin discusses how investors are accounting for political uncertainty and the start of earnings] (4:57) Wall Street Journal - July 13 [Steve Strongin on the low interest rate environment and its impact on investing] Financial Times - July 16 [Goldman Sachs Japan Advisory Director (and England Rugby Coach) Eddie Jones talks team-building] Institutional Investor - July 18 [Goldman Sachs Chief Information Officer R. Martin Chavez ranked among leaders in technology] CNBC - July 18 [Sheila Patel: There's confidence in a US recovery] (3:21) [Subscribe] The data provided in this newsletter is for information purposes only and should not be construed as investment or tax advice nor as a recommendation to buy, sell, or hold any particular security. 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