- Goldman Sachs said the economy and investment landscape was returning to a pre-2008 environment.
- Strategists believe the global economy has outperformed expectations in 2023 and disinflation is expected to continue.
- Conditions are returning to normal with the end of ultra-low rates and
Goldman Sachs estimates a 15% chance of recession in the coming year, and the bank expects some tailwinds to support global growth and investment as the macroeconomic landscape returns to pre-2008 conditions.
In a note to clients this week titled “The Hardest Part is Over,” Goldman strategists led by Jan Hatzius highlighted that economies around the world have outperformed even the most optimistic expectations through 2023.
“2024 should consolidate the view that the global economy has escaped the post-GFC environment of low inflation, zero policy rates and negative real yields,” Hatzius said. “The period following the GFC often felt like an inexorable move towards falling global yields and low inflation – ‘liquidity trap’ and ‘secular stagnation’ were the buzzwords of the decade.”
Policymakers have ended the era of easy money, and the transition to higher interest rates has so far been difficult, as illustrated by high stock market volatility, rapid tightening of financial conditions and the growing number of “zombie” companies. go belly up.
“The big question is whether a return to the pre-GFC rate environment constitutes equilibrium,” according to the strategists. “The answer is more likely yes in the United States than elsewhere, particularly in Europe where sovereign tensions could reappear.”
The Fed cut interest rates to near zero in the aftermath of the Great Financial Crisis, but a return to a high-rate environment could spell trouble for heavily indebted businesses and economic conditions in general.
Other Wall Street forecasters have also warned that a wave of distressed debt and distressed balance sheets will surface in the coming months as financial conditions tighten. Charles Schwab estimated that defaults would peak by the first quarter of 2024.
An advantage for the markets
Goldman expects yields on rates, credit, stocks and commodities to exceed cash in 2024.
“The transition (from the easy money era) has been fraught with challenges, but the upside of this ‘great escape’ is that the investment environment now seems more normal than it did “since the pre-GFC era, and that expected real returns now look decidedly positive,” Hatzius said.
Inflation is expected to continue to fall in 2024, real household income growth is expected to increase, manufacturing activity is expected to rebound and central banks, led by the Federal Reserve, are expected to be increasingly willing to cut rates, according to the ‘business.
“We don’t think the last mile of disinflation will be particularly difficult,” Hatzius said. “First, although the improvement in the supply-demand balance in the goods sector – measured for example by supplier delivery delays – is now largely complete, the impact on core goods disinflation is still being felt. feel and will likely continue through most of 2024.”
Despite their relative optimism, Goldman strategists said they see “higher than normal risks” for 2024.
Even if disinflation continues apace, it is possible that the Fed and other central banks will keep interest rates high for longer than expected.
There are also downside risks around growth, the bank said. The global manufacturing sector’s recovery could be delayed, particularly if high interest rates push companies to normalize their inventory levels relative to sales below 2019 levels.