As we enter 2024, the economic landscape, much to the surprise of many, is showing signs of resilience. This narrative, based on the predictions of Goldman Sachs (NYSE:GS) Research, shows an economic scenario that defies the gloom of the recent past. The global finance giant's report, "Macro Outlook 2024: The Hard Part Is Over," penned by Chief Economist Jan Hatzius, serves as the cornerstone of this optimistic forecast.
A global economy surpassing expectations
2023 was a year of unexpected resilience. The global economy, riding the waves of strong income growth, cooling inflation, and a robust job market, outperformed the forecasts of many economists. This trend is expected to continue into 2024, with Goldman Sachs (NYSE:GS) Research projecting a worldwide gross domestic product (GDP) growth of 2.6% – notably higher than the 2.1% consensus of Bloomberg-surveyed economists.
In this global economic uptrend, the United States stands out, anticipated to outpace its developed market peers once again. The underlying factors are multifaceted – a combination of declining rate hikes impact, a rebound in manufacturing, and the potential for central banks to cut interest rates should economic slowdown concerns intensify.
Goldman Sachs (NYSE:GS) says the hard part is over as we enter 2024.-The global economy remains strong with a low risk of entering a recession.
-More disinflation is in store,which will drive core inflation back down to 2%.
-The Fed and other major central banks around the world are… pic.twitter.com/9cF8ZIJDYm
— Jesse Cohen (@JesseCohenInv) November 10, 2023
A vital component of this economic optimism is the labour market's strength. Unemployment rates have dropped to about 0.5% below pre-pandemic levels across the economies analysed by Goldman Sachs (NYSE:GS) Research. This improvement is significant, particularly in regions like the Euro area, which has experienced low real GDP growth.
Inflation, a key concern in previous years, is showing signs of abatement. The forecast suggests a decline in sequential core inflation from 3% to a 2-2.5% range across the G10 (excluding Japan). This aligns closely with the inflation targets of most developed market central banks by the end of 2024.
Central banks are expected to play a pivotal role in this economic narrative. Their ability to cut interest rates, if necessary, is seen as a crucial "insurance policy against a recession". This approach reflects a broader shift from the aggressive rate hikes of the recent past to a more balanced and nuanced monetary policy.
Regional perspectives: Europe, the UK, Japan and China
In Europe and the UK, real income growth is forecasted to accelerate as the effects of Russia's invasion of Ukraine and subsequent gas shock begin to wane. Meanwhile, Japan's situation is unique, with its inflation rise being largely intentional, as it aims to break free from decades of price stagnation.
China, on the other hand, presents a mixed picture. While policy stimulus is expected to bolster near-term growth, the country faces persistent challenges, including a prolonged property downturn and demographic shifts. China’s GDP growth is projected to slow to 4.8% in 2024, reflecting the complexity of its economic conditions.
One of the more striking aspects of Goldman Sachs Research’s outlook is the low probability assigned to a US recession – just 15% over the next 12 months. This optimism is echoed in the broader global context, with many of the world's largest economies expected to avoid recession in 2024. The reasons for this are diverse, ranging from the fading impact of rate hikes and fiscal policies to an anticipated recovery in industrial activity.
A year of hope and caution
The outlook for 2024 suggests a departure from the low inflation and zero policy rates characteristic of the post-Global Financial Crisis (GFC) era. The years following the GFC were marked by declining global yields and subdued inflation, with terms like "liquidity trap" and "secular stagnation" dominating discussions. However, the response to the post-COVID economic situation appears to have altered this trajectory. Policy rates are now predominantly positive, and real yields have returned to levels seen before the GFC, reducing concerns about deflation.
Although the shift has been challenging, it has led to a more conventional investment environment, reminiscent of the pre-GFC period, with expectations of positive real returns. Last year's emphasis on the resurgence of yield remains pertinent as risk-free rates continue to rise in both nominal and real terms. This presents a scenario that was hardly conceivable in the years since 2008. The focus now is on building portfolios that capitalise on these higher yields while balancing exposure to potential risks, a key aspect of current investment strategies.