Episode Summary
Executive Summary: Goldman Sachs economists Jan Hatzius and Dominic Wilson argue the hard part of the inflation and growth cycle is largely over: global growth should stay resilient in 2024, inflation should keep easing toward central-bank targets, and rate cuts are likely later in the year. Markets have already adjusted somewhat, but they see more room for risk assets and commodities, with the U.S. still outperforming Europe and China.
Main Topics: Why recession did not materialize in 2023 (Priority: 5/5): The economists say the consensus recession call was wrong because the post-pandemic cycle was about normalization, not classic overheating; supply, labor, and goods/service imbalances resolved without a recession. 2024 global growth and disinflation outlook (Priority: 5/5): They expect broadly similar global growth in 2024 versus 2023, with continued disinflation as labor, goods, and housing markets normalize further. Policy outlook: peak rates reached, cuts later (Priority: 5/5): They believe major developed-market central banks have likely finished hiking, with cuts arriving mainly in the second half of 2024 and limited overall easing. Market pricing and asset-class implications (Priority: 4/5): Dom Wilson argues markets have partially repriced the no-recession narrative, but not fully; the team sees modest upside in equities, credit, and especially commodities, with bonds finally marginally beating cash. Regional divergence: U.S. strength, China weakness, Europe recovery (Priority: 4/5): The U.S. remains stronger than consensus, China is slowing structurally despite near-term stimulus, and Europe should improve as real incomes recover and energy/mortgage drags fade. Risks: geopolitics, inflation persistence, fiscal strain, elections (Priority: 4/5): Key risks are exogenous shocks, especially Middle East escalation and oil prices, plus the possibility that inflation proves sticky or that fiscal/political stress unsettles markets.
Key Arguments: The recession fears of a year ago were based on overextending patterns from past cycles that were fundamentally different from the post-pandemic normalization cycle. U.S. growth proved resilient because the economy was rebalancing from pandemic distortions rather than overheating in a way that required recession to restore balance. Markets underestimated the economy's ability to absorb higher rates, especially the U.S. equity market and mega-cap tech tied to AI and earnings strength. Cash and short-duration assets were attractive in 2023 because high policy rates created a difficult hurdle for other assets, especially bonds and international equities. Inflation should continue falling because goods, labor, and housing inflation still have lagged normalization effects that have not fully fed through. Policy rates are likely at or near peak in most developed markets, but central banks should only cut gradually and mostly in the second half of 2024. Higher-for-longer rates are less alarming than in prior cycles because much of the tightening impact on growth has already passed, with the largest effect expected around a two-quarter lag. The market has already partially priced the stronger U.S. growth narrative, but not enough to fully reflect the favorable combination of resilient growth and easing inflation. The dollar should remain relatively strong because U.S. growth and rate differentials still look better than those of other developed markets. The biggest near-term risks are external shocks, especially geopolitical conflict affecting oil, rather than a need for recession to defeat inflation. Commodities, equities, and credit are expected to offer modest positive returns, while bonds should finally edge out cash after several negative years. Portfolio strategy should shift back toward diversification because different asset classes now provide different kinds of downside protection.
Data Points: Global growth forecast 2023: 2.6% - Jan said global growth in 2023 came in around this level. Global growth forecast 2024: 2.7% - They expect similar global growth in 2024, roughly matching 2023. U.S. growth forecast 2024: a little above 2% - Their U.S. outlook is slightly slower than 2023 but still resilient. Euro area growth forecast 2024: a little more than 2023; near 1% - They expect a modest pickup in Europe next year. Core inflation in G10 ex-Japan and selected EM: about 6% in 2022 to 3% sequentially now - Illustrates the scale of recent disinflation. Core inflation expected by end-2024: 2% to 2.5% - Their forecast for inflation returning toward central-bank targets. U.S. recession probability (12 months): 15% - Jan described this as mainly driven by exogenous risks. Fed policy rate estimate: 3.5% to 3.75% - Their revised estimate of where the Fed ultimately settles. Euro area policy rate estimate: 2.5% - Their revised estimate for ECB normalization. Policy-rate adjustment: up 50 bps - They raised major DM terminal-rate estimates by 50 basis points. Rate-hike lag on growth: about 2 quarters - Jan said the maximum impact on the growth rate of GDP comes after roughly two quarters. Level impact lag on GDP: about 1.5 years - He distinguished this from the longer lag for the level of GDP. China growth forecast 2024: 4.8% - Their near-term outlook after modest upward revision. China growth forecast this year: 5.3% - Expected gradual deceleration in 2023/near term. China long-run growth trend: roughly 5% down to roughly 3% over the next decade - Reflects demographic decline and housing overhang. Dollar forecast: about 2% weaker on a trade-weighted basis - Their base case over the next 12 months, despite continued strength.
Pivotal Quotes: "I think this cycle is different." — Jan Hatzius: Explaining why recession models based on prior tightening cycles failed. "The hard part is over." — Podcast title / Goldman Sachs outlook: Summarizing the team’s view that inflation control and rebalancing are largely behind us. "The biggest surprise ... markets underestimating the resilience of U.S. growth in the face of higher rates." — Dominic Wilson: Describing what investors got wrong in 2023.
Implications: Investors should expect a resilient but not booming 2024, with inflation easing, rate cuts arriving late, and a stronger case for diversified portfolios. U.S. assets likely stay favored, while commodities and select risk assets may outperform cash.
About Goldman Sachs Exchanges
In each episode of "Exchanges," people from the firm share their insights on developments shaping industries, markets and the global economy.