The Goldman Sachs Group, Inc. (GS) has jumped on the bandwagon of major global banks, which are reducing their outlook for China’s economic growth. Goldman reduced the real gross domestic product rate to 7.1% from previous forecast of 7.6% for 2015.
The change in the bank’s outlook comes on the heels of concerns over slower growth following weak economic activities. Further, Goldman anticipates the government to cut its growth target for 2015 to limit financial risks along with reducing pressure of easing policies.
Though Goldman has maintained the 2014 expected growth rate at 7.3%, it is expected to be lower than 7.7% in the prior year. Notably, according to the published August activity data, increased tightening of credit in July and August has increased risks of the third quarter recording lower figures. Goldman expects the third and fourth quarter growth forecasts to reduce to 7.1% from 7.3% and 7.2%, respectively.
Additionally, Goldman expects growth to lessen further to about 6.7% in 2016 and 2017 as the rate of potential growth is anticipated to be sluggish, driven by slower-than-expected growth in the labor force and capital stock.
However, Goldman believes that acceleration in external demand and advancement of domestic reforms could increase China's productivity growth.
Similar Moves by Other Banks
Last week, Bank of America Merrill Lynch, a unit of Bank of America Corporation (BAC) reduced its third and fourth quarter growth expectations to 7.2% and 7.3%, both from 7.4%, respectively. Moreover, the bank anticipates growth of 7.3% in 2014 and 7.2% in 2015.
Further, The Royal Bank of Scotland Group plc (RBS) reduced its growth outlook to 7.2% from 7.6% for 2014.
Conclusion
Given the competitive environment and stringent regulatory landscape, global banks are facing tough challenges in controlling costs and increasing revenue. This is certainly restricting their bottom-line growth. To make matters worse, a number of major banks have been encountering legal overhangs in recent times. Therefore, amid ongoing global economic concerns, slow growth in China – the world’s second-largest economy – would be detrimental to the banks’ financials going forward.
Currently, Goldman carries a Zacks Rank #3 (Hold). A better-ranked finance stock worth considering includes Arlington Asset Investment Corp. (AI) with a Zacks Rank #1 (Strong Buy).
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