The global economy has outperformed Goldman Sachs' optimistic expectations in 2023. Global GDP growth is on track to be 1% higher than the consensus of a year ago**, with the US set to be 2% higher, while core inflation will continue to fall from 6% in 2022 to 3% post-COVID pandemic.
There will be more deflation next year. While the product and labor markets are currently doing well, the overall disinflationary effect is still at play, with core inflation likely to fall back to 2-2 by the end of 20245%。
Goldman Sachs still sees a limited risk of a recession next year and reiterates that the probability of a U.S. recession is 15%. Goldman Sachs expects global economic growth to face several tailwinds in 2024, including strong growth in real household incomes, less drag from monetary and fiscal tightening, a recovery in manufacturing activity, and a stronger willingness of central banks to cut interest rates when economic growth slows.
Most eurozone central banks have already finished raising interest rates, but according to Goldman Sachs' fundamentals of the global economy, a rate cut may not come until the second half of 2024. When interest rates eventually stabilize, Goldman Sachs expects the central bank to keep policy rates above long-term sustainable levels.
The Bank of Japan is likely to begin exiting yield curve control in the spring before officially exiting and raising interest rates in the second half of 2024, provided that inflation in the region remains on track to exceed its 2% target. At the same time, China will benefit from further policy stimulus and show growth.
The market outlook is complicated by risk premium compression and market pricing. According to Goldman Sachs, returns on interest rates, credit,** and commodities are expected to outpace cash by 2024. Therefore, a balanced portfolio of assets should replace the cash focus in 2023 and play a greater role in the portfolio.
The transition to a higher interest rate environment has been bumpy, but investors are now faced with the expectation of significantly higher forward returns for fixed income products. The bigger question is whether interest rates can be returned to pre-global financial crisis levels. In the US, the answer seems more affirmative, but not necessarily elsewhere, especially in Europe, where sovereign debt pressures are likely to recur. If there are no challengers to challenge U.S. growth, the dollar is likely to remain strong.
The global economy has outperformed even Goldman Sachs' optimistic expectations in 2023. As shown in the chart below, Goldman Sachs now expects global GDP to grow by 27%, which is 1 percentage point higher than the Bloomberg general a year ago. Among them, the U.S. economy is expected to grow by 24%, a full 2 percentage points higher than the general ** a year ago. Elsewhere there were smaller surprises, but Goldman Sachs expects 88% of economies to beat expectations.
Solid GDP growth translates into more robust labor market performance. Across all economies covered by Goldman Sachs, the unemployment rate, which produces high-quality labor market data, continues to decline modestly in 2022-2023 and is now about 05 percentage points. Importantly, this improvement is evident even in some key economies with very low real GDP growth, such as the eurozone.
Despite some unexpected negative shocks, positive surprises emerged. First, both short- and long-term interest rates have risen much more than the market had suggested – partly because of better-than-expected economic growth data, but partly because central banks have reacted more hawkishly, at least at the beginning of the year.
Second, the U.S. and European banking sectors experienced brief but severe instability this spring. Third, geopolitical issues are a sobering reminder that the world order still faces growing security risks, although so far geopolitical issues have not had a significant impact on oil**, financial markets, or the real economy outside the Middle East.
Even these observations still underestimate the amount of positive news for 2023. In the face of several negative shocks, not only did global economic growth and employment surprise upticks, but all of this happened amid a significant drop in inflation across all economies, with most of the world's economies experiencing a significant post-pandemic period in 2021-2022
As for the extent of the improvement, the chart below shows the average core CPI inflation rate for all G10 economies (excluding Japan) plus emerging market economies, which have experienced a spike in inflation and have therefore implemented the most aggressive monetary policy. Since the end of 2022, month-on-month core inflation in these economies has fallen from 6% to 3%. As a result, many central banks have completed adjustments to bring inflation back to target.
This improvement is widespread across economies. In the G10 and emerging market economies, inflation has come down in a very meaningful way – in most cases dramatically.
In addition, there was a general improvement in all components of the index. The exception was the past year in goods such as energy or used U.S. cars, while more conventional spending such as restaurants, meals or household goods re-anchored to low and stable inflation was the main reason for this improvement.
Goldman Sachs believes that the last mile of deflation will not be particularly difficult. First, the impact on core commodity deflation is ongoing and likely to persist for most of 2024, despite the improved supply-demand balance in the commodity sector.
Second, there is room for housing inflation to fall further. This is true in all economies, although the impact is smaller in the eurozone and the UK.
Third, and most importantly, the balance between supply and demand in the labor market will continue to improve. The employment gap – measured by job openings minus the number of unemployed – is trending downward everywhere. Theoretically, this improvement could occur in a benign way, where job openings are decreasing, but it could also occur in a more pernicious way, where unemployment continues to rise.
In fact, so far, the correction has been benign because fewer job openings have been made, but the unemployment rate has not risen — or, to put it more technically, the "Beveridge Curve" has returned to where it was before the pandemic. We expect this gradual rebalancing to be largely painless, as job openings remain elevated relative to economic fundamentals in most major economies.
Given this improvement and the sharp decline in headline inflation, it is not surprising that nominal wage growth is starting to slow markedly and return to a level consistent with the target. This, combined with broadly anchored inflation expectations, means that an early spike in inflation is unlikely to have a significant second-round impact.
After discussion, Goldman Sachs believes that last year's disinflation will continue. On average, Goldman Sachs expects core inflation to slow to 22.5%, which is broadly in line with the inflation target of most developed country central banks by the end of 2024.
While there is a lot of good news about economic growth and inflation in 2023, some of them are not less worried about a recession next year. Even with the past year significantly better than expected, many** still believe that the probability of a global recession starting in the next 12 months is about 50%. This probability is only slightly lower than the 65% probability at the end of 2022 and well above the 15% probability at Goldman Sachs** (compared to the 35% probability at the end of 2022).
Goldman Sachs expects most of the economies covered by the bank to perform well in the new year. Goldman Sachs** has an average annual growth rate of 2 percent for the global economy in 20246%。Most notably, Goldman Sachs expects growth in the U.S. to once again outpace that of other developed countries.
Goldman Sachs is optimistic about global economic growth for four main reasons. The first reason is that the bank expects real disposable income growth expectations to be more constructive in an environment where headline inflation has fallen sharply and the labor market remains strong. This is despite the fact that real income growth in the United States is expected to slow from 4% in 2023 to 2% in 202475%, but this should still be enough to support consumption and GDP growth of at least 2%. At the same time, real income growth in both the eurozone and the UK will accelerate sharply to around 2% by the end of 2024 as the gas shock recedes in some regions.
The second reason is that while monetary and fiscal policies may be a drag on the growth of the G10 group, the biggest drag seems to have passed. As a result, Goldman Sachs expects tighter financial conditions to weigh less on the global economy in 2024, even taking into account the recent rise in long-term interest rates.
The bank estimates that fiscal policy in 2024 will contribute 0.0 to global economic growthA drag of 2 percentage points is only slightly more than 0 per cent on GDP3 percentage points.
The third reason is that in 2024, manufacturing activity will recover from the slowdown in 2023. This year's weak industrial activity reflects unusual headwinds, including a rebalancing of spending from goods to services, the European energy crisis, and a revision of the destocking cycle. Most of these headwinds will subside this year as spending patterns normalize, prompting the manufacturing sector to shift from lows to recovery.
The last and most novel reason for Goldman Sachs' optimism about economic growth is that central banks will try to avoid a recession because they don't need to bring inflation down at the expense of a recession. Several emerging market countries that raised rates earlier – including Brazil and Poland – have already begun to lower their policy rates from highly restrictive levels and are likely to continue to cut rates steadily.
Goldman Sachs believes that there is no room for preemptive easing in developed economies, but if the growth outlook deteriorates significantly, developed central banks will not waste time before moving to rate cuts. In fact, analysis of past rate hike cycles confirms that once inflation normalizes below 3%, major central banks are twice as likely to cut rates to address downside risks to growth than they were when inflation is above 5%. This is an important insurance measure against a recession.
Author |BT Finance.