• Global growth slowed through 2022 on a diminishing reopening boost, fiscal and monetary tightening, China’s Covid restrictions and property slump, and the Russia-Ukraine war. We expect global growth of just 1.8% in 2023, as US resilience contrasts with a European recession and a bumpy reopening in China.
• The US should narrowly avoid recession as core PCE inflation slows from 5% now to 3% in late 2023 with a ½pp rise in the unemployment rate. 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%. 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 normalization in supply chains and rental housing markets still has a long way to go. And third, long-term inflation expectations remain well-anchored.
• The Euro area and the UK are probably 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 avoid US recession. Given reduced risks of a deep downturn and persistent inflation, we now expect hikes through May with a 3% ECB peak.
• 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. 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.

Source: Goldman Sachs Economics Research - 16 Nov 2022