Goldman Sachs, a multinational investment bank, projects that global economic growth will slow next year.
The firm’s projection contained in its report titled ‘macro outlook 2023: this cycle is different’.
Goldman Sachs said the world’s economy is expected to grow at a slower-than-expected pace of 1.8 percent in 2023 as the United States’ resilience contrasts with a European recession and a bumpy reopening in China.
The projection is lower than the 2.7 percent estimated by the International Monetary Fund (IMF).
“Global growth slowed sharply through 2022 on a diminishing reopening boost, fiscal and monetary tightening, China’s ongoing Covid restrictions and property slump, and the energy supply shock resulting from the Russia-Ukraine war,” the report reads.
“We expect the world to continue growing at a below-trend pace of 1.8 percent in 2023, with a mild recession in Europe and a bumpy reopening in China but also important pockets of resilience in the US and some EM early hikers, such as Brazil.”
The investment bank also predicted that the US was likely to narrowly avoid a recession in 2023.
“The US should narrowly avoid recession as core PCE inflation slows from 5 percent now to 3 percent in late 2023 with a 1⁄2pp rise in the unemployment rate,” Goldman Sachs explained.
“To keep growth below potential amidst stronger real income growth, we now see the Fed hiking another 125bp to a peak of 5-5.25 percent. We don’t expect cuts in 2023.
“How can core inflation fall so much with such a small employment hit? The reason, we think, is that this cycle is different from prior high-inflation periods.
“First, post-pandemic labor market overheating showed up not in excessive employment but in unprecedented job openings, which are much less painful to unwind.
“Second, the disinflationary impact of the recent normalisation in supply chains and rental housing markets still has a long way to go.
“And third, long-term inflation expectations remain well-anchored.”
Meanwhile, Goldman Sachs said the Euro area and the United Kingdom were probably already in recession, mainly because of the real income hit from surging energy bills.
“But we expect only a mild downturn as Europe has already managed to cut Russian gas imports without crushing activity and is likely to benefit from the same post-pandemic improvements that are helping [to] avoid US recession,” it explained.
“Given reduced risks of a deep downturn and persistent inflation, we now expect hikes through May with a 3 percent ECB peak.”
According to Goldman Sachs’ research economists, economic growth is likely to start 2023 on the weak side across most of the Asia-Pacific as a fading reopening boost, slowing global manufacturing cycle, and past monetary tightening weigh on activity.
“China is likely to grow slowly in H1 as an April reopening initially triggers an increase in Covid cases that keeps caution high, but should accelerate sharply in H2 on a reopening boost,” the bank said.
“Our longer-run China view remains cautious because of the long slide in the property market as well as slower potential growth (reflecting weakness in both demographics and productivity).
“Several central banks in Central/Eastern Europe and Latin America started hiking rates well before their DM peers. While none has clearly achieved a soft landing yet, activity has been resilient and inflation is now coming down in some countries, especially Brazil.
“CEE is in a more difficult position because of its commodity exposure, high inflation, and ongoing monetary tightening.”
Earlier this month, there were reports that Goldman Sachs was planning to fire about 4,000 employees next year over ebbing profits.