Where is inflation heading? 🤔

- Plus: Are the strongest years of economic growth behind us? Enjoy some of the top intelligence from Goldman Sachs. --------------------------------------------------------------- In today's edition: - We asked 400 business leaders and investors about [their expectations for the global economy in 2023](. - “The macro psyche I think is evolving and breaking a little bit more to the positive." — Goldman Sachs CEO David Solomon [shares his views]( the global economic outlook. - And is the [period of high and sticky inflation]( drawing closer to an end? (Was this newsletter forwarded to you? [Sign up now.]( --------------------------------------------------------------- Majority at Global Strategy Conference sees recession in 2023 At our 31st annual Global Strategy Conference in London this week, we asked the 400 business leaders and investors about [their expectations for the global economy in 2023](. Here are some of the results, along with the view from Goldman Sachs Research: Peter Oppenheimer, our chief global equity strategist in GS Research, speaking at the Global Strategy Conference. Do you expect a recession in the U.S. in 2023? Client view: 57% of our clients expect a recession in the U.S. This is slightly more optimistic than the consensus among economic forecasters. They peg the probability of a recession at 65%. GS Research view: [Our economists do not expect a downturn in the U.S.]( They say there's only a 35% chance the U.S. economy goes into recession. Where will the Fed stop its hiking cycle? (the Fed funds rate is currently 4.25%-4.5%) Client view: About two out of three respondents expect the Federal Open Market Committee to hike by another 50 or 75 basis points this year, which is consistent with market pricing of +60 basis points. GS Research view: Our economists expect the FOMC to slow the pace of rate hikes further to 25 basis points at the January 31/February 1 meeting. After February, they expect two more 25 basis points hikes followed by an unchanged 5-5.25% funds rate through the end of 2023. In 2023, what will global equity returns be in U.S. dollar terms? Client view: After 2021 and 2022, when global equities returned +17% and -20% respectively, 46% of our clients expect positive, but single-digit returns in 2023. Overall, 73% of our clients expect positive returns this year. GS Research view: Our strategists' targets for regional stock markets suggest global equity returns of low-single digits, or the mid-single digits including dividends. After a strong rally year to date, they remain cautious on equities. [Read more of the results here.]( --------------------------------------------------------------- David Solomon checks in from Davos While attending the World Economic Forum in Davos, Switzerland, Goldman Sachs' David Solomon shared his [perspective on the firm's performance, the macroeconomic environment and the outlook for dealmaking](. “The macro psyche I think is evolving and breaking a little bit more to the positive. Certainly, the first few weeks of the year were a little bit more risk-on in terms of activity broadly,” Solomon said. The view that the U.S. and Europe will experience a soft landing is gaining traction, he said, adding that he expects to see more capital markets activity in 2023. --------------------------------------------------------------- Is inflation finally falling? There are tentative signs that the high and sticky inflation of 2022 could be on the decline, according to Goldman Sachs Asset Management's annual [Investment Ideas report.]( But that doesn't mean inflation will fall evenly across the board. For example, a pressing risk is that tight labor markets fail to relieve pressure on wages and services prices. Also, fresh supply shocks, particularly for commodities, are a possibility. Goldman Sachs Asset Management outlines some key ideas for navigating inflation in the year ahead: - Take a strategic approach to real assets. If inflationary pressures remain elevated in the medium term, real assets such as real estate and infrastructure typically perform well in inflationary environments. Infrastructure assets have benefitted in this environment as their cash flows are typically underpinned by contracts linked to inflation. Additionally, governments are currently embracing some of the largest infrastructure investments in history, thanks to the Inflation Reduction Act. - Time to invest in innovation? 2022 was a difficult year for many technology companies. But given these companies' low valuations, it might be an attractive time for active investors looking to invest in innovation. - Consider small-cap companies. Small-cap stocks have historically performed better than large-caps when inflation has been high and falling. If inflation continues to ease or if the economy slips into recession, these assets may be able to deliver a repeat performance. the full publication for more investment ideas around fixed income assets, recession risks or China's reopening.]( --------------------------------------------------------------- Buybacks boom in the UK and euro area Buybacks, a practice where companies repurchase their own stock, have been increasing in the U.K. and euro area, according to Sharon Bell, a senior strategist on the European Portfolio Strategy team in Goldman Sachs Research. Over the past year, the pace of buybacks in these regions has been higher than in the last 20 years, Bell said at this week's Global Strategy Conference. Buying back shares indirectly returns cash to shareholders. Indeed, a buyback program reduces the number of shares, which boosts the share price while keeping valuations constant. “We tend to focus on buying back shares as something the U.S. market does — absolutely it is something the U.S. does in much greater magnitude than Europe,” Bell says. “But actually in the last year or so, we have seen a huge increase in the U.K. and the euro area.” This trend is supported by several factors, including stronger company balance sheets and lower dividend pay-outs, she says. But buybacks have also increased because European companies in the energy and commodities sectors have been reluctant to invest, so they have been using their vast cash flows to buy back their own stock, Bell says. --------------------------------------------------------------- Are the strongest years of economic growth behind us? Global economic growth is expected to moderate over the coming decades due to a shrinking labor force, says Kevin Daly on the latest episode of [Exchanges at Goldman Sachs](. “Global population growth 50 years ago was around 2% per year,” says Daly, co-head of Goldman Sachs' economics team covering Central and Eastern Europe, the Middle East and Africa. It's now down to around 1% per year and it's projected to fall to zero over the next 50 years, he says. “That slowdown in the demographic picture presents a lot of economic challenges for economies going forward. And it is one of the factors that we expect to drive the slowdown in global growth over time,” Daly adds. Other [long-term trends]( that Daly highlights from his research, [The Path to 2075 — Slower Global Growth, But Convergence Remains Intact]( include continued convergence between emerging and developed markets. “Over longer-term horizons, more economic and also financial market growth is likely to be driven by emerging market economies over time,” Daly says. “That hasn't been so true over the last 10 years, particularly in financial markets perspective where we've had 10 years of exceptional U.S. growth, exceptional U.S. financial market growth, in particular.” --------------------------------------------------------------- Good news for pension plans Pension plans of U.S. companies are in their best shape in 15 years. The funded status of S&P 500 corporate defined-benefit pension plans has risen to 100% — the first time these plans have been fully or over funded since before the global financial crisis in 2008, according to Goldman Sachs Asset Management's [U.S. Corporate Pension Review and Preview 2023.]( While plan assets fell significantly (both for stocks and bonds) last year, obligations fell even more. That's because obligations are determined through actuarial accounting that's linked to interest rates: When interest rates fall, liabilities go up; when rates increase, the opposite happens — which is what took place last year. This is real economics at work, according to Goldman Sachs Asset Management, and not just an accounting feature. Higher interest rates make it more cost-effective for plans to reduce the risks of the pensions via a liability-driven investment program or through a pension risk transfer through a group annuity contract. --------------------------------------------------------------- Briefings brainteaser: The brave new world of 2075 Global economic growth may slow over the coming decades, but some economies will inevitably expand quickly. Which country do economists at Goldman Sachs project to have the second-largest economy by 2075? A) China B) U.S. C) Indonesia D) India [Check your answer here.]( --------------------------------------------------------------- ICYMI: In the media [Bloomberg]( January 19 [Goldman's Gnodde on hiring plans, compensation]( (7:07) [CNBC]( January 16 [Brent crude could hit over $100 a barrel later this year, Goldman Sachs says]( --------------------------------------------------------------- --------------------------------------------------------------- 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. Goldman Sachs has no obligation to provide any updates or changes to the data. No investment decisions should be made using this data. To the extent this newsletter includes material from Goldman Sachs Global Banking & Markets, please [click here]( for information relating to Goldman Sachs Global Banking & Markets material and your reliance on it. To the extent this newsletter includes material from Goldman Sachs Asset Management, please [click here]( for additional disclosures. [Click here]( to unsubscribe. © 2022 Goldman Sachs, All rights reserved. 200 West Street, New York, NY 10282, USA --------------------------------------------------------------- [GS.com]( | [Careers Blog]( | [Privacy and Security]( | [Terms of Use]( [Twitter](