Goldman Sachs predicts return to pre-2008 economy, but is that a good thing for Europe?

Copyright © BusinessAMBE 2023

After some 15 years, the post-banking crisis era (around 2008) is finally coming to an end, Goldman Sachs strategists believe. This period was characterized by low inflation, slow growth, zero interest rates and negative real returns.

The period of “free money” led to the situation of recent years, where inflation has risen sharply. Central banks are now trying to control that with higher interest rates. The question is how governments will deal with this new reality.

In the news: Goldman Sachs, with David Solomon as CEO, has prepared its forecasts for the coming year and they are quite optimistic for the United States.

• Inflation is expected to continue to fall, the risk of a recession would not be very high and conditions in the financial markets will improve.
• The bank puts the probability of a recession in the United States next year at only 15 percent.
• As for inflation, Goldman Sachs acknowledges that “the final stretch of disinflation will be particularly difficult,” but that history is moving in the right direction, with a return to the 2 percent target by 2024.
• Goldman Sachs sees room for good performance in the markets. For example, the S&P 500 could grow 8 percent next year and close at 4,700 points. Remarkably, the bank believes that artificial intelligence (AI) is not a bubble and that technology companies related to AI continue to perform.
• However, economic growth may be affected by maintaining high interest rates longer than expected. It will be up to central banks to balance recession and inflation.
• While 2024 will not be a risk-free year, it does mark the return to a more normal situation.

Financial crisis finally digested

Zoomed out: By that “normalcy,” Goldman means a return to pre-2008 economic conditions.

• Low inflation, slow growth and zero interest rates – this post-2008 period seems to have ended, according to Goldman Sachs.
• 2023 marked the end of monetary policy with “helicopter money,” the return of higher interest rates, the tightening of financial conditions and, ultimately, the end of “zombie companies,” companies that were dependent on government support due to health and energy crises.

A new eurozone debt crisis?

“The big question is whether a return to the situation before the financial crisis is balanced,” the financial strategists ask. “The answer is more likely to be yes in the United States. Elsewhere, it’s a different story, especially in Europe where sovereign tensions may become visible again.”

• A high interest rate environment could hurt the finances of some highly indebted European states and reduce confidence in their ability to repay interest. There is the risk of an excessive spread (spread) between Italian government bonds and German Bunds.
• Just yesterday, the European Central Bank (ECB) warned of a new debt crisis in the euro zone. “Higher financing costs and less prudent fiscal policies could raise concerns about the sustainability of sovereign debt, especially in countries where debt levels are already high,” ECB Vice President Luis de Guindos warned in a speech in Frankfurt.
• The focus is on Italy, where the government led by Prime Minister Meloni is not too tough on the budget deficit.

(evb)

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