Jan Hatzius, chief economist and head of global investment research at Goldman Sachs, explained Thursday morning why the bank believes it’s unlikely a recession will occur next year, an opinion most other Wall Street forecasters don’t agree with.
Hatzius and his colleagues estimate there is a 15 percent chance of a U.S. recession happening in 2024, a likelihood much lower than peers. The median Bloomberg Consensus forecaster says there is a 50 percent chance of a recession, down from 65 percent in late 2022. (Goldman was also a little contrarian at the end of 2022, pegging the chance of a recession at 35 percent.)
To Goldman, the reason for a little more optimism is straightforward: interest rate hikes by central banks tamped down inflation but didn’t wreck economies. And hikes by the Federal Reserve are over, the bank says.
The global economy outperformed the bank’s more optimistic-leaning expectations in 2023. Gross domestic product growth is on track to beat consensus forecasts from a year ago by 1 percentage point globally and 2 percentage points in the U.S. Meanwhile, core inflation is down from 6 percent in 2022 to 3 percent sequentially across economies that saw a post-Covid price surge, according to a Goldman report.
“If you look across both the developed economies and the emerging economies that had a serious inflation problem, on average, we've seen some declines in some places, some small increases in others, but generally a very strong labor market and we've seen a very material decline in inflation,” Hatzius said.
The bank is forecasting 2.6 percent global growth and 2.1 percent U.S. growth next year, and that the U.S. inflation rate will continue to fall next year and be back to 2 or 2.4 percent before 2025.
It also expects some tailwinds to continue next year: 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 cuts — as a sort of insurance — if growth slows.
Given the more positive outlook, Goldman also says asset classes will perform relatively differently than they did in 2023. Returns from equities, fixed income and commodities will exceed cash in 2024 and investors should adjust portfolios accordingly. “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,” Goldman said in its outlook report.
It’s unclear what exactly a normal rate environment will end up looking like in the U.S. but Goldman said it’s likely to be similar to the regime prior to the global financial crisis in 2008. In that case, sovereign financial stress is more likely to occur in Europe and other places than in the U.S. and “without a clear challenger to the U.S. growth story, the dollar is likely to remain strong,” Goldman said.
All of that bodes well for stocks in 2024.
“Our bottom line conclusion is that there is modest upside potential for U.S. equities. We put some numbers on that, about 5 percent for the S&P 500 [and] maybe 1.5 percent for dividends,” David Kostin, chief U.S. equity strategist at Goldman Sachs, said. “So looking at roughly 6 percent total return.”
