- Goldman Sachs said the economy and investment environment are returning to pre-2008 conditions.
- Strategists said the global economy should outperform expectations in 2023 and continue disinflation.
- With the end of ultra-low interest rates, the situation is normalizing.
Goldman Sachs sees a 15% chance of a recession over the next 12 months and expects several tailwinds to support global growth and investment as the macro environment returns to pre-2008 conditions.
In a note to clients this week titled “The Hard Part Is Over,” Goldman strategists led by Jan Hadsius emphasized that the global economy has outperformed even optimistic expectations through 2023.
“By 2024, there should be a growing view that the global economy has emerged from the post-GFC environment of low inflation, zero policy interest rates, and negative real yields,” Hazzius said. “The period since the global financial crisis has often felt like an inexorable move towards lower global yields and lower inflation. ‘Liquidity trap’ and ‘secular stagnation’ have been the buzzwords of the past decade. Ta.”
Policymakers have put an end to the era of easy monetary policy, but so far high interest rates have been a challenge, as evidenced by high stock market volatility, rapid tightening of financial conditions, and a growing number of “zombie” companies. The transition to this is extremely difficult. My stomach is bloated.
“The big question is whether a return to the pre-global financial crisis interest rate environment can be called equilibrium,” the strategists said. “The answer is more likely to be yes in the United States than in other countries, especially in Europe where sovereign stress could flare up again.”
The Fed cut interest rates to near zero in the aftermath of the Great Financial Crisis, but a return to a high-interest-rate environment could pose challenges for heavily indebted companies and broader business conditions.
Other Wall Street forecasters have also warned that a wave of bad debt and troubled balance sheets will surface in the coming months as financial conditions tighten. Charles Schwab estimates that defaults will peak between now and the first quarter of 2024.
Good news for the market
Goldman expects returns on interest rates, credit, stocks and commodities to exceed cash by 2024.
“Transition [from the easy money era] After a turbulent past, the positive side of this ‘Great Escape’ is that the investment environment looks more normal than at any point before the global financial crisis, and real expected returns look reliably positive.” he said.
Non-cash assets could outperform cash in 2024, according to Goldman Sachs
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inflation The company believes national income will continue to decline in 2024, real household income growth will increase, manufacturing activity will recover, and central banks led by the Federal Reserve will become increasingly willing to cut interest rates. .
“I don’t think the last mile of eliminating inflation will be particularly difficult,” Hazzius said. “First, although the improvement in the supply and demand balance in the goods sector, as judged by supplier delivery delays, etc., is now almost complete, the disinflationary impact on core goods is still ongoing and will continue through most of 2024. It is likely that this will continue.”
Goldman strategists are relatively optimistic, but said they expect “higher-than-usual risks” in 2024.
Even if disinflation continues at some level, the Fed and other central banks could keep interest rates high for longer than expected.
Goldman Sachs announces probability-weighted federal funds forecast is below modal baseline forecast
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There are also downside risks to growth, the bank said. The recovery in global manufacturing could be delayed, especially if high interest rates prompt companies to normalize inventory levels relative to sales below 2019 levels.