“The initial steps along this path have been successful, but there is much further to go in 2023….Unlike consensus, we do not expect a recession,” it said in a note.
The first step in keeping the adjustment process on track is ensuring that gross domestic product (GDP) growth remains below potential, it noted.
The fiscal tightening that helped to slow the economy this year has mostly run its course, but the large tightening in financial conditions engineered by the Federal Reserve should keep GDP growth near 1 per cent in 2023, it said.
Consumer spending should grow a bit more firmly as income begins to rise again, but this is likely to be offset by weakness elsewhere, especially in housing.
The second step requires soft GDP growth to further reduce labour demand. So far, the speed and composition of labour market rebalancing have been encouraging.
The third step requires labour market rebalancing to slow wage growth. Wage growth has begun to moderate in recent months, and Goldman Sachs expects it to fall to 4 per cent by the end of 2023, not far above its 3.5 per cent estimate of the pace compatible with 2 per cent inflation.
The fourth step requires softer wage growth to bring inflation back to target. This should get under way in 2023 but will take longer. The company expects core personal consumption expenditure (PCE) inflation to fall from roughly 5 per cent to 3 per cent by December 2023, driven largely by goods categories where supply chain recovery is now reversing pandemic shortages.
ALCHEMPro News Desk (DS)
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