World economy to perform better than expected in 2024, says Goldman Sachs

Goldman Sachs predicts the global economy will top expectations in 2024, driven by strong income growth and confidence that the worst of rate hikes is already over.

The investment bank forecasts the world economy to expand 2.6% next year on an annual average basis, above the 2.1% consensus forecast of economists polled by Bloomberg. The U.S. is expected to outpace other developed markets again with estimated growth of 2.1%, Goldman said.

Goldman also believes that the bulk of the drag from monetary and fiscal tightening policies is over.

To curtail rising inflation, the U.S. Federal Reserve started its aggressive rate hike campaign in March 2022 as inflation climbed to its highest levels in 40 years. Last Thursday, Fed Chair Jerome Powell said he is “not confident” the Fed has done enough to tackle inflation, and suggested that more rate hikes may be necessary.

Goldman said policymakers in developed markets are unlikely to cut interest rates before the second half of 2024 unless economic growth comes in weaker than estimated.

The bank noted inflation has also continued to cool across G10 and emerging market economies, and is expected to ease further.

“Our economists forecast this year’s decline in inflation to continue in 2024: sequential core inflation is predicted to fall from 3% now to an average 2-2.5% range across the G10 (excluding Japan),” the report stated.

Global production has been in a slump for most of the year. S&P Global’s gauge of worldwide manufacturing activity came in at 49.1 in September. A reading below 50 indicates a contraction in activity. Additionally, China’s Caixin/S&P Global manufacturing PMI fell to 49.5 in October from 50.6 in September, marking the first contraction since July.

Manufacturing activity should recover somewhat in 2024 from a subdued 2023 pace, Goldman economists led by chief economist Jan Hatzius said, especially as “spending patterns normalize, gas-intensive European production finds a trough, and inventories-to-GDP ratios stabilize.”

In September, the bank had cut their forecast for a U.S. recession from 20% to 15% on the basis of cooling inflation and a resilient labor market.

While rate hikes and fiscal policy will still continue to weigh on the growth across G10 economies, Hatzius is confident that the worst of that “drag” is already over.

“Both the Euro area and the UK are expected to have a meaningful acceleration in real income growth — to around 2% by end-2024 — as the gas shock following Russia’s invasion of Ukraine fades,” the economists also noted.