China's exit from Covid won't be straightforward

- Plus: Ever wondered what the global economy might look like in 2075? We can help with that. Enjoy some of the top intelligence from Goldman Sachs. --------------------------------------------------------------- In today's edition: - China relaxed its Covid rules this week, but [don't expect a full reopening soon.]( - "We shouldn't miss the forest for the trees." - [Why blockchain can go beyond crypto](. - Half of working women believe their retirement savings are behind schedule, [this report says](. (Was this newsletter forwarded to you? [Sign up now.]( --------------------------------------------------------------- China's Covid reopening won't be straightforward [China relaxed some of its Covid rules this week]( as the country inches closer to an exit from its zero-Covid policy. But don't expect a full reopening of China's economy anytime soon. The fundamental challenge faced by Chinese policymakers is the rising economic cost of maintaining their zero-Covid policy while the vaccination rate for elderly citizens is still low, according to our chief China economist Hui Shan. “The path for the world's most populous and second-largest economy to reopen after almost three years of zero-Covid policy will probably not be straightforward,” she wrote in a report. Goldman Sachs Research identified four reopening scenarios, with the third scenario being the most likely: - An immediate, abrupt reopening in a somewhat disorderly manner. - China launches reopening immediately but manages the pace to cope with the capacity of the health care system. - China reopens in April 2023 after steady preparations at the beginning of the year. This is the baseline GS Research forecast and is expected to be the most likely path forward. In this scenario, Shan forecasts that China's real GDP growth will rise 1.5 percentage points to 4.5% in 2023, and then to 5.3% in 2024. - China continues to tighten Covid controls substantially in the months ahead, with significant restrictions for much of next year. --------------------------------------------------------------- The global economy in 2075: Slow growth as Asia rises Our economists and strategists recently [published their outlooks]( for the year ahead on everything from global stocks to the likelihood of a U.S. recession. This week, Goldman Sachs Research economists Kevin Daly and Tadas Gedminas published [a report that looks much further ahead — to 2075](. They foresee a world in which global economic expansion slows as population growth declines. Emerging economies, and powerhouses in Asia in particular, are forecast to keep catching up to richer countries. - Economic expansion is ebbing as the world's rate of population growth slows. That rate has halved during the past 50 years — it's now less than 1% — and according to UN population projections, it will stall by 2075. Weakening productivity, linked to a slowdown in globalization, is another reason our economists expect GDP growth to fade. - In 2050, the world's five largest economies (measured in U.S. dollars) are projected to be China, the U.S., India, Indonesia and Germany, with China overtaking the U.S. as world's largest economy in 2035. India is expected to have the world's second-largest economy by 2075. The prospect of rapid population growth in countries like Nigeria, Pakistan and Egypt implies that these economies — with the appropriate policies and institutions — could become some of the largest in the world in around 50 years. - Our economists think protectionism and climate change are two of the biggest risks to their projections. Populist nationalists are in power in some countries, and supply-chain disruptions during Covid have resulted in a greater focus on resilience and on-shoring. Reconfiguring the world's economy for sustainable growth won't be easy, but many countries have been able to decouple carbon emissions and GDP growth, which demonstrates the possibilities for the global economy as a whole. --------------------------------------------------------------- Asset allocation in 2023: diversification and divergence Market volatility, inflation and positive correlations across assets have raised questions about the benefits of multi-asset portfolios. But as inflation normalizes and growth slows, investors could see greater diversification opportunities, says Christian Mueller-Glissmann, who leads the asset allocation team for Goldman Sachs Research. Look for greater divergence in growth, inflation, monetary policy and foreign exchange, [Mueller-Glissmann tells Allison Nathan, host of Exchanges at Goldman Sachs](. We might be entering a phase of more divergence, he says, with the U.S. grappling with rising prices linked to services and the labor market, while in Europe and many other places in the world, inflation is linked to energy. Also China will go through a bumpy reopening. “That could potentially drive major divergences in the inflation picture [and] in monetary policy and FX,” he says. In addition, “there are definitely more opportunities in fixed income,” says Mueller-Glissmann. Rather than thinking of bonds as providing a buffer and offering negative equity market correlations and diversification benefits, he says, “bonds can have another role in the portfolio, which is to generate returns,” he says. “I think that is coming back. And that's something which we haven't had in a few years.” --------------------------------------------------------------- A US recession risk in 2023? The two factors to watch In our[outlooks for 2023]( Goldman Sachs Research estimates the U.S. will narrowly avoid a recession next year. Chief Economist Jan Hatzius [says there are two opposing forces at play, one positive and one negative]( – and the positive one should prove stronger. “On the positive side, real disposable income is now growing…we're expecting real disposable income to grow by more than 3% over the next year,” Hatzius says. “Now, against that, on the negative side, financial conditions have tightened substantially…[the Federal Reserve is] basically leaning against this income improvement because they're trying to keep growth at a below potential pace.” When you put those two opposite forces together, what we get is a 1% real GDP growth for 2023 — below trend but still positive, according to Hatzius. --------------------------------------------------------------- Blockchain goes well beyond crypto, David Solomon says Blockchain, the decentralized digital ledger technology behind cryptocurrencies, can support responsible innovation across the entire financial industry, according to Goldman Sachs CEO David Solomon. [In The Wall Street Journal]( Solomon argues that crypto is only one of blockchain's many applications and that “we shouldn't miss the forest for the trees.” “The technology is already making our own work more efficient. Using blockchain, we've been building trading platforms where clients can trade with each other in minutes.” Solomon says. “Last week, using our new tokenization platform, we arranged a €100 million two-year digital bond for the European Investment Bank with two other banks, all based on a private blockchain.” A bond sale like that typically takes five days to settle, but because of blockchain this one only took 60 seconds, Solomon says. “Under the guidance of a regulated financial institution like ours, blockchain innovations can flourish,” he added. --------------------------------------------------------------- Half of working women believe their retirement savings are behind schedule In [Navigating the Financial Vortex: From Retirement Readiness to Retirement Income]( Goldman Sachs Asset Management highlights the challenges that working and retired individuals face as they save and invest for their retirement. A [newly released report, Women and Retirement Security]( takes a deeper look at gender differences. The report, which surveyed 1,566 individuals in July and August 2022, describes the headwinds women face in preparing for retirement. The survey found that overall, women are more likely to reach retirement with insufficient savings than men. And only 47% of working women surveyed reported that their retirement savings are either on track or ahead of schedule (vs. 64% of men). --------------------------------------------------------------- BRIEFINGS brainteaser: Fear factor According to Wall Street's so-called “fear index,” the VIX (also known as the Chicago Board Options Exchange Volatility Index), equity volatility is relatively low compared with recent periods of economic downturns. Which of the years below saw the highest end-of-day peak in the VIX? A) 2008 B) 2011 C) 2015 D) 2020 [Check the answer here.]( --------------------------------------------------------------- ICYMI: In the media [CNBC]( December 6 [A soft landing is more likely than not, says Goldman Sachs' Luke Barrs]( [CNBC]( December 6 [Goldman Sachs' David Kostin: 3750-4000 is the range you're likely to see for S&P]( [Bloomberg]( 6 [Goldman CEO Solomon on ‘bumpy times,' bonuses, blockchain]( (10:23) --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. The data provided in this newsletter is for information purposes only and should not be construed as investment or tax advice nor as a recommendation to buy, sell, or hold any particular security. Goldman Sachs believes the data in this newsletter is accurate, but does not verify its accuracy independently and does not warrant or guarantee that it is accurate or complete. 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