Key Points

  • 1. Goldman Sachs predicts that the global economy will exceed expectations in 2024, based on robust income growth, cooling inflation, and a resilient labor market.
  • 2. The forecast includes a recovery in the manufacturing sector, which serves as a safety net against a recession.
  • 3. Goldman Sachs anticipates that global GDP will grow by an average of 2.6% next year, surpassing economists' consensus estimates.
  • 4. The firm highlights four key arguments for optimism, including real income growth, completion of monetary policy tightening, and improved balance between supply and demand in the labor market.
  • 5. Interest rate cuts in developed markets are unlikely before the second half of 2024, but emerging markets may announce rate cuts earlier.

As the new year begins, economists are contemplating the future of the global economy in 2024. Goldman Sachs, one of the world's most prominent investment banks, predicts that the global economy will exceed expectations this year. What factors underpin this optimistic outlook?

According to analysts at the New York-based firm, the forecast is based on the anticipation of robust income growth, a context of cooling inflation, and a resilient labor market. Additionally, they foresee that the impact of interest rate hikes has already had its most significant effect on GDP growth.

The projection includes a certain recovery within the manufacturing sector. "This serves as a significant safety net against a recession," remarked Jan Hatzius, Chief Economist at Goldman Sachs Research, in the report titled 'Macro Outlook 2024: The Hard Part Is Over'.

Goldman Sachs anticipates that the global GDP will grow by an average of 2.6% next year, surpassing the consensus of economists surveyed by Bloomberg, which estimated a 2.1% growth rate. Moreover, Goldman Sachs' growth predictions for 2024 are more optimistic than the consensus for eight out of the nine largest economies globally. They also anticipate that the growth in the United States will outpace that of its counterparts in developed markets.

Previously, economists at the New York-based firm had expressed more optimism than the consensus for 2023. However, the final results surpassed even their own expectations, especially in regions with low real GDP growth, such as the eurozone. "The robust GDP growth has translated into a more than solid labor market performance. The unemployment rate across economies covered by our analysts (with high-quality labor market data) now stands about 0.5 percentage points below its pre-pandemic level," they highlighted.

Goldman Sachs: The 4 Reasons for Optimism

The Goldman Sachs team underscores four key arguments supporting their optimistic stance:

Real Income Growth Amid significantly lower inflation and still robust labor markets, the anticipation is for "much lower" general inflation. While strategists anticipate a slowdown in US real income growth compared to the strong pace of 2023, they believe it will remain adequate to sustain consumption and at least 2% GDP growth. Meanwhile, both the Eurozone and the UK are expected to experience significant acceleration in real income growth, reaching around 2% by late 2024, as the gas crisis following Russia's invasion of Ukraine dissipates.

Completion of Monetary Policy Tightening

"We expect the impact of financial conditions tightening to be less in 2024 than in 2023, even considering the recent increase in long-term interest rates," Hatzius stated.

Industrial activity has been weak due to a shift in spending towards services rather than goods, the European energy crisis, an inventory cycle correcting the overbuilding in 2022, and a weaker-than-expected rebound in Chinese manufacturing. Most of these adverse factors are expected to fade this year, leading to a recovery in the manufacturing sector towards long-term trend levels.

Moreover, the "newest reason" for optimism regarding GDP growth is that central banks do not require a recession to reduce inflation "and will thus strive to avoid one."

"The analysis conducted by our economists of past tightening cycles shows that major central banks are twice as likely to cut rates when there is a growth risk once inflation has normalized below 3% (compared to when inflation is above 5%)," they added.

Inflation: What Lies Ahead for the US and Europe?

As mentioned earlier, a significant question for 2024 is the trajectory of inflation. GDP growth and employment have been "surprisingly robust" among economies that experienced a "sharp and unwanted" surge in inflation between 2021 and 2022 and a noticeable moderation in 2023 due to central banks' tight monetary policies. In their last meeting of the year, the Federal Reserve (Fed) appeared slightly more optimistic than their European counterpart, the European Central Bank (ECB). The Frankfurt-based institution warned that inflation could experience an uptick early in the year and ruled out discussing rate cuts for the time being. Conversely, the Fed took a more 'dovish' stance than the market expected and hinted at possibly cutting interest rates up to three times next year.

According to the Goldman Sachs expert, the supply and demand of goods "have balanced out more," and the impact of this on the deflation of basic goods "is still developing and is expected to continue for most of 2024."

More importantly, the balance between supply and demand in the labor market continues to improve. "Goldman Sachs Research's employment-worker gap – measured as job openings minus unemployed workers—tends downward everywhere. So far, the adjustment has occurred almost entirely benignly, as job openings have decreased without unemployment rising," explained the New York-based firm.

According to these economists, the decline in inflation from this year will persist in 2024, and they anticipate that sequential core inflation will fall from the current 3% to an average range of 2%-2.5% across the G10, except in Japan. "That would be broadly consistent with the inflation targets of most central banks in developed markets by late 2024. In any case, we believe the risks to achieving inflation consistent with the targets lean towards the earlier side," Hatzius added.

Interest Rate Cuts: When Will They Happen?

However, "significant interest rate cuts in developed markets before the second half of 2024 are unlikely... unless economic growth turns out to be weaker than expected." In part, Goldman Sachs' opinion is based on a forecast that inflation will remain "slightly" above target, that unemployment rates will remain below long-term levels, and that GDP will grow "approximately at the trend rate" in 2024. In emerging markets, however, rate cuts are expected to be announced earlier. Overall, Goldman Sachs believes that two countries could stand out from the rest: Japan and China. In the case of Japan, it stands out because its inflation surge was "largely desired." After three decades of anemic price pressures or absolute deflation, the wage increases of 2023 indicated that the Bank of Japan was approaching its goal of establishing a "virtuous circle" between wages and prices.