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Goldman Sachs’s macro analysts have been notably more optimistic than almost everyone else on the street throughout 2023, and, as a result, basically nailed it.
Sure, there are some asterisks — China actually looks messier after the great reopening proved a damp squib, the bond market still had some puke left to discharge, the stock market rally is mostly driven by the ‘magnificent seven’ and geopolitics continue to freak a lot of people out.
But it’s fair to say things have turned out a LOT better than most people would have predicted a year ago — most people, except Goldman. We do, in fact, gotta hand it to them.
Here is their victory lap, charted:
Their big 2024 macro outlook is now out, and it’s mostly notable for humming the same catchy “Everything Is Awesome” tune. If you think we’re exaggerating, the title is “The Hard Part is Over”.
Global economic growth will remain fine, there will be no US recession, inflation will continue to fall, interest rates have peaked and all major financial markets will do better than cash (which tbf is a much harder hurdle to clear than it was a few years ago).
Here are the main points from Jan Hatzius & co:
— The global economy has outperformed even our optimistic expectations in 2023. GDP growth is on track to beat consensus forecasts from a year ago by 1pp globally and 2pp in the US, while core inflation is down from 6% in 2022 to 3% sequentially across economies that saw a post-covid price surge.
— More disinflation is in store over the next year. Although the normalization in product and labor markets is now well advanced, its full disinflationary effect is still playing out, and core inflation should fall back to 2-2½% by end-2024.
— We continue to see only limited recession risk and reaffirm our 15% US n recession probability. We expect several tailwinds to global growth in 2024, including strong real household income growth, a smaller drag from monetary and fiscal tightening, a recovery in manufacturing activity, and an increased willingness of central banks to deliver insurance cuts if growth slows.
— Most major DM central banks are likely finished hiking, but under our baseline forecast for a strong global economy, rate cuts probably won’t arrive until 2024H2. When rates ultimately do settle, we expect central banks to leave policy rates above their current estimates of long-run sustainable levels.
— The Bank of Japan will likely start moving to exit yield curve control in the spring before formally exiting and raising rates in 2024H2, assuming inflation remains on track to exceed its 2% target. Near-term growth in China should benefit from further policy stimulus, but China’s multi-year slowdown will likely continue.
— The market outlook is complicated by compressed risk premia and markets that are quite well priced for our central case. We expect returns in rates, credit, equities, and commodities to exceed cash in 2024 under our baseline forecast. Each offers protection against a different tail risk, so a balanced asset mix should replace 2023’s cash focus, with a greater role for duration in portfolios.
— The transition to a higher interest rate environment has been bumpy, but investors now face the prospect of much better forward returns on fixed income assets. The big question is whether a return to the pre-GFC rate backdrop is an equilibrium. The answer is more likely to be yes in the US than elsewhere, especially in Europe where sovereign stress might reemerge. Without a clear challenger to the US growth story, the dollar is likely to remain strong.
A lot of you will want to kick the tyres on their thesis yourselves, so here is a link to the full note.
Of particular note is their argument that the “last mile of disinflation” won’t actually be that hard, won’t actually require a recession and might not even need any more rate increases.
We like the sound of this, but can’t help but worry that Goldman is tempting fate with the “hard part over” hed.