- Goldman Sachs said the economy and investment landscape are returning to a pre-2008 environment.
- Strategists said the global economy exceeded expectations in 2023 and disinflation is likely to continue.
- With the end of extremely low interest rates, conditions are returning to normal
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Goldman Sachs estimates a 15% chance of recession next year, and the bank expects a handful of tailwinds to support global growth and investment as the macro landscape returns to pre-2008 conditions.
In a note to clients this week titled “The Hard Part is Over,” Goldman strategists led by Jan Hatzius emphasized that economies around the world have exceeded even optimistic expectations through 2023.
“The year 2024 should cement the idea that the global economy has escaped the post-GFC environment of low inflation, zero policy rates and negative real yields,” Hatzius said. “The period since the global financial crisis has often felt like an unstoppable trend toward lower global yields and low inflation – ‘liquidity trap’ and ‘secular stagnation’ were the watchwords of the decade.”
Policymakers have put an end to the era of easy money, and the transition to higher interest rates has been rocky so far, as evidenced by high volatility in the stock market, rapid tightening of financing conditions and the increasing number of “zombie” companies .
“The big question is whether a return to interest rates before the global financial crisis represents equilibrium,” said the strategists. “The answer is more likely to be yes in the U.S. than elsewhere, particularly in Europe, where government bond issues could arise again.”
After the Great Financial Crisis, the Fed cut interest rates to near zero, but a return to a high interest rate environment could spell trouble for heavily indebted companies and overall 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 worsen. Charles Schwab estimates that defaults will peak sometime by the first quarter of 2024.
Upside potential for the markets
Goldman expects returns on interest rates, credit, stocks and commodities to exceed cash returns in 2024.
“The transition [from the easy money era] “It’s been a bumpy ride, but the upside of this ‘great escape’ is that the investment environment now looks more normal than at any time since the pre-GFC era and real return expectations are now clearly positive,” Hatzius said.
According to Goldman Sachs, non-cash assets could surpass cash in 2024
According to the firm, inflation should 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.
“We don’t think the last mile of disinflation will be particularly hard,” Hatzius said. “First, while the improvement in the supply-demand balance in the goods sector – as measured, for example, by supplier delivery delays – is now largely complete, the impact on disinflation in core goods is still being felt and is likely to continue through most of 2024. “
Despite their relative optimism, Goldman strategists said they see “above-average risks” for 2024.
Even if disinflation continues steadily, it is possible that the Fed and other central banks will keep interest rates high for longer than expected.
Goldman Sachs says its probability-weighted Fed Funds forecast is below its Goldman Sachs base modal forecast
There are also downside risks to growth, the bank said. A recovery in global manufacturing could be delayed, especially if high interest rates force companies to normalize their inventories relative to sales below 2019 levels.