Outlook for Global Growth: Less Synchronized, More Complicated

Episode Summary

Executive Summary: Jan Hatzius said Jackson Hole reinforced Goldman’s expectation that the Fed will announce tapering in November and begin in December, likely reducing asset purchases by $15 billion per meeting. He argued U.S. growth has peaked but remains solid, inflation is still temporary though higher in 2021, labor markets should strengthen as benefits expire, and the biggest global risk remains COVID variants.

Main Topics: Fed tapering outlook after Jackson Hole (Priority: 5/5): Hatzius said Powell’s remarks and the July FOMC minutes point to a November taper announcement and December start, with advanced notice making September unlikely. He expects gradual tapering and no rate hikes until after QE ends. U.S. growth downgrade and peak in activity (Priority: 5/5): Goldman revised 2021 U.S. growth down by about one percentage point, citing the Delta wave and slower service-sector normalization. He said the economy likely passed its growth peak, though recovery continues. Global growth divergence by region (Priority: 4/5): He described a more uneven global recovery: China slowed due to zero-COVID restrictions, parts of Asia were hit by outbreaks, Europe and the UK continued recovering well, and Latin America generally improved. Inflation remains elevated but temporary (Priority: 5/5): Despite stronger 2021 inflation prints, Hatzius maintained that the inflation surge is temporary, with 2022 inflation expected to normalize near prior forecasts. He noted the Fed’s average inflation targeting could influence timing. Labor market effects of enhanced unemployment benefits (Priority: 4/5): He argued extended unemployment benefits materially reduced labor supply, and their expiration should boost payrolls and lower unemployment, even if participation recovers only gradually. Wage pressures and sustainability (Priority: 4/5): Wage gains at the low end of the pay distribution have been unusually rapid, but he expects them to cool as benefits end. Mid-range wage growth appears steadier and more sustainable given productivity gains. Key risks: virus variants and fiscal drag (Priority: 5/5): He said the main downside risk is still COVID—especially variants that evade vaccines—while a fading fiscal impulse also poses a cyclical headwind, though secondary to the pandemic.

Key Arguments: The Fed likely needs to give advance notice before tapering, making a September announcement improbable and November the base case. Tapering is expected to proceed slowly, likely at $15 billion per meeting, which would end purchases by late next year. U.S. growth has been revised down because Delta infections slowed reopening, especially in services and office return-to-work trends. The broader global recovery is increasingly uneven, with China and parts of Asia facing virus setbacks while Europe and the UK continue to catch up. Inflation is still viewed as temporary: 2021 prints are high, but Goldman expects 2022 core PCE to return close to prior levels. Enhanced unemployment benefits likely constrained labor supply; their expiration should add materially to payroll growth. Low-end wage growth has been distorted by benefits making non-work nearly as attractive as work, but this should normalize as support ends. The greatest macro risk remains a more dangerous COVID variant that undermines vaccines, though vaccination progress should still help reduce risk over time.

Data Points: U.S. 2021 GDP growth forecast: 6.0% - Revised down from about 7% or slightly above; now around consensus or slightly below. Reduction in 2021 U.S. growth forecast: about 1 percentage point - Goldman cut its U.S. growth outlook due largely to Delta-related effects. Federal asset purchases: $120 billion per month/meeting - Starting level for the Fed’s QE taper discussion. Baseline taper pace: $15 billion per meeting - Goldman’s expected speed of tapering once it begins. Potential end of asset purchases: by October next year - Projected outcome if tapering proceeds at $15 billion per meeting. First rate hike timing: third quarter of 2018 in forecast language - Transcript appears to reflect a historical timing reference; the speaker said hikes would depend on growth and inflation outcomes. 2021 core PCE inflation forecast: 3.75% - Upwardly revised U.S. inflation outlook for 2021. Prior 2021 core PCE forecast: around 2.5% - Earlier-year estimate before inflation surprises. 2022 core PCE inflation forecast: 1.8% - Expected normalization back near pre-surge levels. Expected payroll impact from benefit expiration: 1.5 million - Estimated additional job growth as federal unemployment benefits expire. Wage growth at low end of pay distribution: 25% to 30% annualized - Observed recent wage growth for production and non-supervisory workers in leisure and hospitality. Average wage level for leisure and hospitality workers: $15 per hour - Used to explain why enhanced benefits heavily affected labor supply. Composition-adjusted wage growth: about 3.5% - Wage growth in the middle of the income distribution. Global fully vaccinated population by year-end: 50% - Goldman’s expectation for worldwide vaccination progress. China third-quarter sequential growth forecast: about 1.5% - Lowered due to Delta-related restrictions and zero-COVID policy. China annual growth forecast: 8.2% to 8.25% - Down a few tenths from prior expectations. U.S. output gap vs pre-pandemic trend: 2% to 3% below trend - Despite returning to roughly the pre-pandemic level, the U.S. remains below trend.

Pivotal Quotes: "our baseline is that we'll get a November announcement and a December start to tapering" — Jan Hatzius: On the likely timing of Fed tapering after Jackson Hole and the July FOMC minutes. "we now think that the peak is probably behind us" — Jan Hatzius: On U.S. growth momentum after revising forecasts lower. "the biggest risk is still going to be COVID" — Jan Hatzius: On the primary downside risk to the U.S. and global outlook.

Implications: Expect a slower but still expanding recovery, with Fed normalization starting late 2021, inflation easing in 2022, labor markets tightening as benefits expire, and market attention staying focused on virus variants and the pace of reopening.