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    The likelihood of a US recession in the coming year has declined amid signs of a still-solid job market, according to Goldman Sachs Research. Our economists say there’s a 15% chance of recession in the next 12 months, down from their earlier projection of 20%. That’s in line with the unconditional long-term average probability of 15%, writes Jan Hatzius, head of Goldman Sachs Research and the firm’s chief economist, in the team’s report.  The most important reason for the forecast change is that the US unemployment rate fell to 4.051% in September — below the level in July, when the rate jumped to 4.253%, and marginally below the June level of 4.054%. The unemployment rate is also below the threshold that activates the “Sahm rule,” which identifies signals that can indicate the start of a recession. The rule is triggered when the three-month average US unemployment rate increases by 0.50% or more from its low during the previous 12 months. “The fundamental upward pressure on the unemployment rate may have ended via a combination of stronger labor demand growth and weaker labor supply growth (because of slowing immigration),” Hatzius writes. Nonfarm US payrolls grew by 254,000 in September, a sharp upside surprise to what economists expected. Prior months of payroll reports were revised higher, and household employment data was also solid. The underlying trend in monthly jobs growth is 196,000, according to Goldman Sachs Research, well above its pre-payrolls estimate of 140,000 and modestly above its estimated breakeven rate (the number of new jobs needed to prevent an increase in the unemployment rate) of 150,000-180,000. “This brings the job market signal back into line with the broader growth data,” Hatzius writes. Real GDP grew 3% in the second quarter and an estimated 3.2% in the third quarter. The annual revision to the national accounts in September shows that real gross domestic income (GDI) — a conceptually equivalent measure of real output — has been growing even faster than real (inflation-adjusted) GDP over the last few quarters. The upward revision to income also fed into an upward revision to the personal savings rate, which now stands at 5%. While this is still modestly below the pre-pandemic average of 6%, the gap is explained by the strength of household balance sheets, notably the increase in the household net worth/disposable income ratio. “The revisions to GDI and the saving rate didn’t surprise us, but they strengthen our conviction that consumer spending can continue to grow at solid rates,” Hatzius writes. The strong activity data and the recent rebound in oil prices on fears of escalation of the conflict in the Middle East haven’t changed Goldman Sach Research’s conviction that inflation will cool further. After a period of slightly higher gains, the alternative rent indicators have declined again, reinforcing our economists’ forecast that rent and owners’ equivalent rent (OER) will continue to decelerate. Average hourly earnings grew a faster-than-expected 0.4% in September, but broader signals remain encouraging. Even as Goldman Sachs Research’s wage tracker stands at 4% year-on-year — and the rate compatible with 2% core PCE inflation is estimated at 3.5% — the employment cost index shows that much of the overshoot is related to unionized wages, which tend to lag broader trends. On a related note, the preliminary resolution of the East and Gulf Coast port strike has eliminated a risk to near-term prices. If US Federal Reserve officials had known what was coming, the Federal Open Market Committee might have cut rates by 25 basis points on September 18 instead of 50 basis points, Hatzius writes. But that doesn’t mean it was a mistake. “We think the FOMC was late to start cutting, so a catch-up that brings the funds rate closer to the levels of around 4% implied by standard policy rules makes sense even in hindsight,” Hatzius writes. The latest jobs data strengthens Goldman Sachs Research’s conviction that the next few FOMC meetings (including November 6-7) will bring smaller 25 basis point cuts. Our economists expect the Fed to reduce rates to a terminal funds rate of 3.25% – 3.5%.

    The German economy is going through a challenging period. GDP growth has fallen behind the rest of Europe and the US in recent years amid high energy prices and weakness in China, a vital trading partner. But there are signs that some headwinds facing Germany industry may begin to abate. These were among the topics on the minds of corporate leaders and investors gathered for the 13th Goldman Sachs German Corporate Conference in late September. More than 170 German listed companies were represented, and more than 1,000 participants came to hear from and meet with them. The three-day event was held in Munich, a growing hub for the European technology sector, where Goldman Sachs recently opened its second office in Germany. “Many corporate leaders and investors, both at the conference and more broadly, are highly concerned about the country’s structural challenges,” says Michael Schmitz, co-head of FICC and Equities for Germany and Austria in Global Banking & Markets. “There are reasons to believe that Germany will return to growth over the medium term, but it will be a long path.” There are developments that may help to revive Europe’s largest economy. Energy shortages are easing and Germany’s green energy transition is attracting investment, according to Goldman Sachs Research. German stocks may be primed for further gains, Schmitz says, citing our analysts’ research. We caught up with Schmitz after the conference to discuss the attitude among German businesses leaders and investors, the rise in German stocks, the country’s critical automobile sector, as well as the reaction to the recent competitiveness report by former European Central Bank President Mario Draghi. Is the German economy being overestimated or underestimated? The German economy is going through very difficult times. The country has materially underperformed other advanced economies in recent years. Goldman Sachs Research finds that real GDP is actually unchanged since 2019 in Germany. Compare that to the rest of the developed world: The euro area is up 5%, and in the US over the same period GDP is up 9%. Some of Germany’s challenges are short-term, like the past reliance on Russian natural gas. Others are more structural, like the economy’s dependence on China trade. But we have handled difficulties before in Germany, and we see opportunities for the economy in coming years. What were some of the opportunities for German corporations and its economy discussed at the conference? The executives, clients, and investors we gathered in Munich all believe in the core strength of Germany and its potential. Despite all the challenges that we read about every day, Germany remains a stable and attractive place to do business. People are very interested in foreign direct investment trends in Germany, which suggest there may be strong growth in green and digital projects in Germany. There may be a growing opportunity for Germany to develop startups in artificial intelligence infrastructure, in order to better retain tech talent. Tesla for example helps to prove that Germany is well placed to lead the green transition in Europe. The company decided to build — and now expand — its European Gigafactory near Berlin in part to take advantage of the high local skill levels and the pan-regional supply chain links. Another positive is that up to €160 billion ($175 billion) in the German federal budget is earmarked for hydrogen infrastructure, according to The Economist Intelligence Unit. This has the potential to future-proof Germany’s energy intensive industries, which previously relied on cheap natural gas imports Does this mean the German economy is getting past its problems? Many corporate leaders and investors, both at the conference and more broadly, are highly concerned about the country’s structural challenges. There’s a lack of public infrastructure investment in the country, and it has fallen behind on key metrics like digitalization, according to Goldman Sachs Research. Our economists find that the economy is subject to more regulation when compared to other advanced economies. There are reasons to believe that Germany will return to growth over the medium term. Energy shortages are easing and, as mentioned before, the country has opportunities in green energy and AI. But it will be a long path. The auto industry is of utmost importance for Germany, and the outlook for that industry is clearly challenging. The automotive sector contributes roughly 4% directly to German GDP, according to Goldman Sachs Research, and the overall effect is almost twice that. It continues to lose global market share. Amid the rising importance of electric vehicles, there’s a lack of cost competitiveness versus China. Chemicals is an important industry for Germany. Is there an opportunity there? If you look at chemicals and the natural gas supply, which is key for this industry, Goldman Sachs Research’s expectation is that Germany may benefit from a huge increase in liquid natural gas (LNG) supplies from 2025 to 2028, leaving behind the energy crisis that was triggered by the Russia-Ukraine conflict. The longer-term gas price outlook appears favorable for Germany. Our strategists forecast a significant uptick in energy supply growth that will bring the global gas market to material oversupply. If you combine this with the significant green energy transition, Germany looks well positioned to benefit. An interesting development, a positive inflection point, our researchers have reported that European power demand is up 1% or 1.5% in several regions already. It’s a reason to be optimistic. Amid the economic challenges, how do you explain the rise in Germany’s DAX index of stocks? It’s quite interesting. The DAX is up more than 14% year-to-date in 2024 (as of October 10), and the index rose 19% for the full year in 2023. The DAX has outperformed France’s CAC 40 so far this year. It’s resilient because it’s not strongly tied to the German economy. Only 18% of sales of DAX companies are made in Germany, according to Goldman Sachs Research. In contrast, our research analysts note that the MDAX midcap index is 33% exposed to Germany, and the smaller companies in the SDAX are 50% exposed

    Goldman Sachs Research forecasts another solid year of global economic growth in 2025. Our economists project the US will outperform expectations while the euro area lags behind amid fresh tariffs that are anticipated from the Trump administration. Worldwide GDP is forecast to expand 2.7% next year on an annual average basis, just above the consensus forecast of economists surveyed by Bloomberg and matching the estimated growth in 2024. US GDP is projected to increase 2.5% in 2025, well ahead of the consensus at 1.9%. The euro area economy is expected to expand 0.8%, compared to the consensus of 1.2%. “Global labor markets have rebalanced,” Goldman Sachs Research Chief Economist Jan Hatzius writes in the team’s report titled “Macro Outlook 2025: Tailwinds (Probably) Trump Tariffs.” “Inflation has continued to trend down and is now within striking distance of central bank targets. And most central banks are well into the process of cutting interest rates back to more normal levels.” The world’s largest economy is expected to grow faster than other developed-market countries for the third year in a row. The re-election of US President Donald Trump is predicted to result in higher tariffs on China and on imported cars, much lower immigration, some fresh tax cuts, and regulatory easing. “The biggest risk is a large across-the-board tariff, which would likely hit growth hard,” Hatzius writes.     Will changes in trade increase US inflation? US core PCE inflation should slow to 2.4% by late 2025, higher than Goldman Sachs Research’s prior forecast of 2.0% but still a benign level. The forecast would rise to around 3% if the US imposes an across-the-board tariff of 10%. In the euro area, our economists expect core inflation to slow to 2% by late 2025. The risk of ultra-low inflation in Japan has abated. “A key reason for optimism on global growth is the dramatic inflation decline over the past two years,” Hatzius writes. “This directly supports real income because price inflation has fallen far more quickly than wage inflation.” “Just as importantly, the inflation decline also indirectly supports demand by allowing central banks to normalize monetary policy and thereby ease financial conditions,” he adds. Goldman Sachs Research expects the US Federal Reserve to cut its policy rate to 3.25-3.5% (from 4.5% to 4.75% now), with sequential cuts through the first quarter and a slowdown thereafter. The European Central Bank, meanwhile, is expected to lower its policy rate to a terminal rate of 1.75%. Our economists find that there’s also significant room for policy easing in emerging markets. By contrast, the Bank of Japan is projected to lift its policy rate to 0.75% by the end of 2025. How will Trump’s trade policy impact the US economy? The effects of potential new US trade policies on US GDP are expected to be small and largely offset by other factors, according to Goldman Sachs Research’s baseline outlook. Potential tariffs would result in a modest hit to real (inflation adjusted) disposable personal income via higher consumer prices. The uncertainty of how much further trade tensions might escalate would likely weigh on business investment. “Assuming that the trade war does not escalate further, we expect the positive impulses from tax cuts, a friendlier regulatory environment, and improved ‘animal spirits’ among businesses to dominate in 2026,” Hatzius writes. In Goldman Sachs Research’s base case, trade policies may have a net drag of 0.2 percentage points on US GDP in 2025. If larger than anticipated across-the-board tariffs are implemented, that could cause a net drag averaging 1 percentage point in 2026 (though it could be lower if tariff revenue is fully recycled into tax cuts). The US has grown faster than other big economies and is predicted to continue doing so. Goldman Sachs Research points out that labor productivity in the US has increased at a 1.7% annualized rate since late 2019, a clear acceleration from the pre-pandemic trend of 1.3%. By contrast, labor productivity in the euro area has grown at a 0.2% annualized rate over the same period, a clear deceleration from 0.7% before the pandemic. “We expect US productivity growth to remain significantly stronger than elsewhere, and this is a key reason why we expect US GDP growth to continue to outperform,” Hatzius writes. How US trade policies may affect other economies The economic headwind from US trade policy is expected to be greater outside the US. In the euro area, a rise in trade policy uncertainty to the peak levels of the trade conflict in 2018-19 would subtract 0.3% from GDP in the US but as much as 0.9% in the euro area. Our economists reduced their growth forecast for the euro area in 2025 following the US election results by 0.5 percentage points (fourth quarter over fourth quarter) and would likely cut it further if the US imposes an across-the-board tariff. Goldman Sachs Research expects the impact of potential US trade policy on China to be even more direct. The world’s second-largest economy may face tariff increases of up to 60 percentage points and average 20 percentage points across all exports to the US. That’s forecasted to subtract almost 0.7 percentage points from growth in China in 2025. Our economists reduced their 2025 growth forecast modestly, by 0.2 percentage points on net to 4.5%, assuming Chinese policymakers provide stimulus and some of the growth hit is offset by depreciation in the renminbi. “However, we would likely make larger downgrades if the trade war were to escalate further,” Hatzius writes. Likewise, other countries are also likely to be buffeted by US trade policy. Goldman Sachs Research expects larger drags in more trade-exposed economies, while certain emerging market countries could get a boost by gaining export share if trade shifts away from China. Overall, however, global economic growth is expected to be solid despite the potential for US tariffs. Our economists estimate that changes to US trade policy will subtract 0.4% from global GDP, while increased policy support should dampen the hit. But much depends on

  The world’s largest economy is forecast to outperform economist expectations again next year, according to Goldman Sachs Research. “The US economy is in a good place,” writes David Mericle, chief US economist in Goldman Sachs Research. “Recession fears have diminished, inflation is trending back toward 2%, and the labor market has rebalanced but remains strong.” Goldman Sachs Research predicts US GDP will grow 2.5% on a full-year basis. That compares with 1.9% for the consensus forecast of economists surveyed by Bloomberg. Three key policy changes following the Republican sweep in Washington are expected to affect the economy, Mericle writes in the team’s report, which is titled “2025 US Economic Outlook: New Policies, Similar Path.” Tariff increases on imports from China and on autos may raise the effective tariff rate by 3 to 4 percentage points. Tighter policy may lower net immigration to 750,000 per year, moderately below the pre-pandemic average of 1 million per year. The 2017 tax cuts are expected to be fully extended instead of expiring and there will be modest additional tax cuts. How will Trump’s policies impact the US economy? While the expected policy changes under President elect Donald Trump may be significant, Mericle doesn’t project that they will substantially alter the trajectory of the economy or monetary policy. “Their impact might appear most quickly in the inflation numbers,” Mericle writes. Wage pressures are cooling and inflation expectations are back to normal. The remaining hot inflation appears to be lagging “catch up” inflation, such as official housing prices catching up to the levels reflected by market rents for new tenants. Goldman Sachs Research forecasts that core PCE inflation, excluding tariff effects, will fall to 2.1% by the end of 2025. Tariffs may boost this measure of inflation to 2.4%, though it would be a one-time price level effect. Our economists’ analysis of the impact of the tariffs during the first Trump administration suggests that every 1 percentage point increase in the effective tariff rate would raise core PCE prices by 0.1 percentage points. “While we have yet to see definitive evidence of labor market stabilization, trend job growth appears to be strong enough to stabilize and eventually lower the unemployment rate now that immigration is slowing,” Mericle writes. The economy was able to grow faster than Goldman Sachs Research’s estimate of potential GDP growth over the last two years, in part because a surge in immigration boosted labor force growth. Next year, a tightening job market is expected to replace the role of elevated immigration. Policy changes, meanwhile, are anticipated to have roughly offsetting effects on economic expansion over the next two years. “The drag from tariffs and reduced immigration will likely appear earlier in 2025, while tax cuts will likely boost spending with a longer delay,” Mericle writes. Policy changes are likely in other areas too, such as a lighter-touch approach to regulation. But the effects are expected to occur mainly at an industry level rather than a macroeconomic level. How likely is a US recession? “Recession fears have faded as the downside risks that had worried markets failed to materialize,” Mericle writes. There’s 15% chance of US recession in the next 12 months, according to Goldman Sachs Research, which is roughly in line with the historical average. “Consumer spending should remain the core pillar of strong growth, supported both by rising real income driven by a solid labor market and by an extra boost from wealth effects,” Mericle writes. “And business investment should pick back up even as the factory-building boom fades.” There are risks to the economy, however. A 10% universal tariff, which would be many times the size of the China-focused tariffs that unnerved markets in 2019, would likely boost inflation to a peak of just over 3% and hit GDP growth. Markets could become concerned about fiscal sustainability at a time when the debt-to-GDP ratio is nearing an all-time high, the deficit is much wider than usual, and real interest rates are much higher than policymakers anticipated during the last cycle. The outlook for the Fed during the Trump administration Goldman Sachs Research expects the Federal Reserve to continue to cut the funds rate down to a terminal rate of 3.25-3.5% (the policy rate is 4.5% to 4.75% now), which would be 100 basis points higher than in the last cycle. That’s because our economists expect the Federal Open Market Committee to continue nudging up its estimate of the neutral rate (typically considered the interest rate that neither stimulates nor slows the economy). In addition, non-monetary policy tailwinds — in particular, large fiscal deficits and resilient risk sentiment — are offsetting the impact of higher interest rates when it comes to demand.

    Goldman Sachs Research expects continued growth from the UK economy in 2025, although its expansion may be slower than some economists anticipate. Our economists forecast the UK’s GDP to increase 1.2% in 2025, which is slower than the Bank of England’s projection of 1.5% and just below the consensus estimate of economists surveyed by Bloomberg of 1.3%. The team forecasts 0.4% growth in the first three months of 2025 relative to the last three months of 2024, slowing to around 0.25-0.30% quarter on quarter in the rest of next year. The British economy will be impacted by several key factors including uncertainty around trading arrangements with the US, a less expansionary budget, and proposed changes to the planning system for housing and development. Our economists expect inflationary pressures to ease through 2025, introducing the potential for deeper interest rate cuts than the market has priced in. Market prices suggest the BoE will stop reducing interest rates at 4%, but our economists believe the central bank will continue cutting as far as 3.25%. “We continue to think that the BoE will likely cut further than the market currently expects as measures of underlying domestic inflation fall back and demand comes in somewhat weaker than the Monetary Policy Committee’s latest forecast,” Goldman Sachs Research’s Chief European Economist Sven Jari Stehn writes in the team’s report, which is titled “UK Outlook 2025: A Gradual Pace, but More Cuts Than Priced.”  How will US tariffs impact the UK economy? The UK’s trading arrangements will be a major focus next year. Uncertainty surrounding potential tariffs from the administration of US President-elect Donald Trump will likely weigh on confidence and is expected to notably reduce euro area growth. These tensions could also spill over into the UK, though probably to a lesser degree. Given the openness of the British economy, a global shift towards increased tariffs could hurt the country’s growth prospects. On the other hand, recent reports have indicated that the US may consider offering the UK a free-trade agreement in return for potential changes to food standards and greater market access for US healthcare companies. The UK could also pursue closer ties with the EU: The government plans to strike a veterinary agreement, and Chancellor Rachel Reeves has hinted at regulatory harmonization in the chemicals sector. But the growth boost from these developments wouldn’t be enough to meaningfully reduce the costs of Brexit, and it could run counter to closer trading relations with the US. The outlook for the UK budget The UK’s autumn budget was more expansionary than expected, raising the prospect of stronger demand in the near-term. Even so, the updated plans still indicate consolidation in 2025, and growth is expected to cool in the second half of the year. The Office for Budget Responsibility will deliver a forecast update in the spring, which will be closely watched by markets. “The government has left limited headroom against its new fiscal targets, and relatively small changes in the OBR’s macroeconomic forecasts could eliminate this headroom entirely,” Stehn writes. Our economists think economic growth may prove lower than the OBR’s projections, increasing the chances that the OBR will revise its debt-to-GDP forecast upwards. Planning reform could gradually boost UK GDP growth The government also intends to reform the planning system for housing and development. Although it’s difficult to quantify the effect of the reforms without further policy details, our economists broadly expect the changes to result in a boost to residential investment over the next five years. But the impact of any planning reforms on GDP growth over the medium term will depend on whether they increase labour productivity. A range of studies show that wages and productivity are higher in large cities, so relaxing planning restrictions could boost aggregate productivity by allowing urban areas to expand. “Some studies have indicated that this effect could be sizeable in the very long run,” Stehn writes. “But we would expect any boost to productivity to occur gradually over an extended period of time.” Inflation is forecast to ease in 2025 Inflation is expected to be firmer in the near term, easing throughout 2025. Public sector pay deals and government consumption following the autumn budget will support strong demand, while increases in vehicle excise duty and the introduction of VAT on private school fees could drive up prices in the services sector. Nonetheless, Goldman Sachs Research sees domestic inflationary pressures falling back next year. Data from surveys conducted by the BoE suggest that tightness in the labor market is also likely to ease. “This continued easing in labour market tightness — together with reduced catch-up effects now that inflation has returned close to target — are likely to result in a notable slowing in pay growth next year,” Stehn writes. Reduced pay pressures are likely to result in services inflation declining gradually. This could lead to headline inflation undershooting the BoE’s latest projections: Our economists’ analysis puts headline inflation at around 2.3% in the final quarter of 2025, four-tenths below the BoE’s November forecast. They expect core inflation to fall to 2.5% by the end of next year. The outlook for BoE rate cuts Goldman Sachs Research expects the BoE to cut interest rates further and over a longer period than the market anticipates during this cutting cycle. Our economists anticipate that the BoE will hold rates steady at 4.75% in December, given that inflation and growth are likely to remain firm in the near term. But with slowing inflation now likely in 2025, Goldman Sachs Research predicts quarterly cuts to interest rates throughout next year and into 2026, until the Bank Rate hits 3.25% in the second quarter of 2026.

    China’s economy is projected by Goldman Sachs Research to grow at a slower pace in 2025, as the government’s stimulus efforts partially offset the impact of potential tariffs from the US. Real GDP growth is predicted to decelerate to 4.5% next year from 4.9% in 2024. Goldman Sachs Research’s forecast assumes a 20 percentage-point increase in the effective tariff rate imposed by the incoming Trump administration on Chinese goods, which would weigh on China’s real GDP by 0.7 percentage point in 2025. The forecast also assumes that Chinese policymakers will introduce fresh stimulus to blunt the impact of tariffs. “The choice in front of Chinese policymakers is simple: either to provide a large dose of policy offset or to accept a notably lower headline real GDP growth,” Chief China Economist Hui Shan writes in the team’s report. “We expect them to choose the former.” In other aspects, the focus for China’s leadership hasn’t changed: Officials are determined, over the medium term, to steer the economy toward a technology-driven and self-reliant growth model. The cost of doing so — climbing the ladder to produce higher quality growth — is slower economic expansion, according to Goldman Sachs Research. Our economists forecast real GDP growth to average 3.5% from 2025 to 2035, compared to 9.0% during 2000-2019. “The Chinese economy faced significant growth headwinds in 2024, and policymakers finally started more forceful easing in late September,” Shan writes. “How Chinese policymakers will lean against the wind to stabilize domestic consumption and the property market, and to manage renewed US-China trade tensions, will be the overarching theme of 2025.” How will China support its economy? Historically, China’s government has looked to support its economy through infrastructure and property construction. This time around, Goldman Sachs Research believes China’s policymakers will likely react by cutting policy rates considerably and increasing the fiscal deficit. Strong exports have been the sole bright spot in the Chinese economy this year, contributing 70% of the expected 4.9% headline real GDP growth, according to Goldman Sachs Research. Even though Chinese exporters may continue to gain market share in emerging-market countries, amid significantly higher US tariffs, growth of total exports is likely to decelerate sharply. The contribution to real GDP growth from exports may drop materially next year.  Chinese exports to non-US countries (which are estimated to be more than 85% of China’s total exports) will likely increase modestly in 2025, thanks partly to strong price competitiveness and potential currency depreciation. Goldman Sachs Research expects China’s total goods export volume to be flat next year relative to this year (versus a 13% gain in 2024). The outlook for inflation in China Goldman Sachs Research’s inflation projections are notably below the consensus estimates of economists. Shan expects CPI and PPI inflation to be 0.8% and 0% next year, respectively, compared to Bloomberg’s consensus of 1.2% and 0.4%. “There are structural factors weighing on inflation, including the multi-year housing downturn and persistent industrial overcapacity,” Shan writes. “Restoring consumer confidence and strengthening labor markets and wage growth are likely to take time.” Policymakers in September pledged a raft of measures to support everything from China’s property sector to its equity market amid slowing consumption. Household consumption contributed just 29% to headline GDP in the third quarter of 2024, down from 47% in the second quarter and 59% before the onset of the pandemic. Goldman Sachs Research expects growth in household consumption to stay flat at 5% in 2025. “The weakness in domestic demand has finally struck the ‘policy put,’ and the current easing emphasizes local government debt resolution, household consumption, and equity market performance,” Shan writes. Is China’s property market near the bottom? Still, China’s ongoing property downturn is likely to continue to be a significant drag. New home starts and government revenue from land sales plunged by 60-70% from their peak in 2020-21. New home sales and completions almost halved in the latest data. Given the many structural challenges, our economists see “no quick fix” for the nationwide property sector and expect the downturn to be a multi-year drag on growth for the Chinese economy.  Goldman Sachs Research projects that the property sector will likely weigh on China’s GDP growth by 2 percentage points in 2025 (versus -2.1 percentage points in 2024). The team expects the growth drag to narrow starting from 2026 but to linger until 2030. “With incremental housing easing measures ahead, it is possible to see a stabilization of home prices in some large cities next year — but probably not nationwide,” Shan writes. “For many construction-related property activities, their multi-year downtrend appears inevitable.” While our economists’ 4.5% forecast for GDP in 2025 is in line with consensus expectations, they note the range of possible outcomes is wide for next year. Higher-than-expected tariffs by the US administration is a key downside risk; US president-elect Donald Trump has threatened to raise them by as much as 60 percentage points, and revoking China’s Permanent Normal Trade Relations status would see the effective tariff rate climb by 40 percentage points. Regarding the upside risk, Chinese goods exports could prove more resilient than expected, which could cause growth to come in higher than forecast.

    Germany’s economy, which has lagged behind its peers in recent years, faces a series of headwinds in 2025, including trade uncertainty with the US, still-high energy prices, and growing competition from China. Elections in February will provide an opportunity to tackle the country’s challenges. Europe’s largest economy is forecast to expand 0.3% in 2025, which is slower than the estimate for the euro area of 0.8% and for the UK of 1.2%, according to Goldman Sachs Research. The country’s real (inflation adjusted) GDP is unchanged since the fourth quarter of 2019. For all the challenges, there are also signs of German industry finding ways to adapt. “Even though industrial production is down significantly over the last few years, the amount of value added has actually been much more stable,” says Goldman Sachs Research Chief European Economist Jari Stehn. “German companies have been able to respond by moving out of relatively low-margin production in chemicals or paper, and so on, into higher value production. I think the way forward essentially is for German companies to continue to do that.” We spoke with Stehn and analyst Friedrich Schaper about Goldman Sachs Research’s forecast for GDP growth in Germany, competition from China, and the prospect for some easing of high energy prices. Why has Germany’s economy underperformed other advanced economies in recent years? Jari Stehn: Since the end of 2019, the statistics are quite striking. GDP in Germany has been flat over that period while the rest of the euro area has grown by 5%, and the US has grown 11%. There are a few obvious reasons for that. One is the energy crisis that hit Germany particularly hard since it was so reliant on Russian pipeline gas. Germany has a lot of energy-intensive production, and its economy is quite heavily focused on manufacturing activity. So it’s natural that the increase in energy prices had a bigger effect on Germany than on other countries. Second, Germany is highly exposed to China. This has been a big asset in the past because China has grown a lot. But over the last few years growth in China has slowed, so Germany has sold fewer goods into China. Also, China has become more of a competitor over time, particularly over the last two to three years. China now produces goods that are more like the goods that Germany produces. So essentially, China has transitioned from a key export destination to a key competitor, and it has gained market share, particularly in sectors where Germany has seen big cost increases. Third, Germany has a number of broader structural issues, such as the degree of regulation that business startups face and public underinvestment. Cumulatively over the last few years, they have put Germany in a less competitive position. When you take all of that together, it explains a good chunk of the of the underperformance. Your GDP growth forecast of 0.3% for 2025 is below the consensus. What explains the difference? Jari Stehn: First, we think that many of the structural headwinds that we just talked about will continue. But then, on top of that, we also expect significant trade tensions from the second Trump administration. Germany is likely to be particularly exposed to those tensions because it’s a very open economy. It’s heavily focused on industrial activity. When you look back at the first Trump term, we saw a very sharp growth slowdown in 2018 and 2019. The day after the US election we downgraded our forecast for all of Europe, but particularly for Germany. Are you expecting most of the economic impact to come from tariffs or the mere possibility of them? Jari Stehn: The takeaway from the first Trump term was you didn’t actually see many tariffs implemented on Europe, but you saw a lot of discussions around tariffs that created a lot of uncertainty, a lot of trade tension. In the end, those had big effects on investment, on confidence, and on growth in Germany. We have set out two scenarios. One, which is our base case, is that you get a sharp increase in trade tensions, but ultimately the actual tariffs that you see are relatively limited and targeted on the auto sector. The auto sector is obviously big in Germany, so you still see a significant hit. Our estimate is a 0.6% hit to the level of GDP. The downside scenario involves an across-the-board tariff on all European imports into the US. In that scenario, we think the negative effects would be significantly bigger — about twice as large. Either way, we think there is going to be a pronounced period of uncertainty, and that uncertainty will weigh on confidence and investment. What are the market implications, particularly for Bunds, of the February election in Germany? Friedrich Schaper: The market is focused on the potential for a looser fiscal stance in Europe and for Germany in particular, and the elections could be a catalyst for such loosening. However, we argue that even at the upper end of our range of expectations about higher fiscal spending, the increase in duration supply of German Bunds is relatively modest compared to the notable increase in safe asset supply that we are already observing. That’s mainly because of a structural shift in the fiscal stance in Europe and the European Central Bank, which is reducing its balance sheet. That has made an impact already, and it’s showing up in higher Bund yields and higher interest rates for euro assets. So the additional impulse of higher spending after the elections is already well reflected in pricing, in our view. Coupled with the outlook for slowing economic growth, which we expect will lead to a sustained cycle of interest rate cuts from the ECB, Bunds remain our favorite long position among G-10 bonds. Going back to the energy situation in Germany, are you expecting any relief on the cost front next year? Jari Stehn: Energy prices have come down significantly from the peak days of the

    UK government bond yields have risen amid investor concern about the government’s fiscal outlook and sticky inflation. Even so, Goldman Sachs Research projects the country’s borrowing costs will decline by the end of the year as the Bank of England cuts its policy rate. “We still think the UK data will justify more cuts than the market is pricing,” says George Cole, head of European rates strategy in Goldman Sachs Research. Our strategists project 100 basis points of cuts in 2025, compared with the 41 basis points of cuts that’s priced into the bond market. The team forecasts 10-year gilt yields will fall to about 4% by the end of 2025 from 4.9% (as of January 13), the highest since 2008. British bond yields, along with those of many governments, have been climbing since September. Cole says one simple reason for the broad increase in borrowings costs is that there’s a lot of government borrowing. The US ran a $1.8 trillion budget deficit last year, which was about 6% of GDP. The budget deficit in France was around 6%, and in the UK it was about 4.5%. “There are a lot of bonds to buy everywhere,” Cole says. Will central banks cut interest rates in 2025? While there are idiosyncratic reasons why gilt yields have increased in the past week, the US has been an important engine behind the rise in global interest rates. The Federal Reserve cut rates by 50 basis points in September, more than some investors had anticipated. But since then, the country’s economic data has been running hot — the US added 256,000 jobs in December, which was substantially more than economists had forecast. Goldman Sachs Research pushed back its forecast for Fed rate cuts from three cuts this year to two, with one in 2026, after the December payroll report. Investors have also questioned whether Trump administration policies such as tariffs will be inflationary. “We may be starting to learn that cutting cycles are not going to be quite as deep as we thought, because of the near-term stickiness in inflation,” Cole says. “We don’t think that that’s something you should overstate. There are still going to be interest rate cuts to come. But at the more global level, we’re experiencing a slight difficulty in digestion because those expectations for rate cuts are being pared back.” Why gilt yields have risen UK government bond yields, with some exceptions, roughly tracked those of the US until last week. That’s when the pound depreciated against a trade-weighted basket of currencies and the stock market showed signs of softening. Those fluctuations show that investors are demanding more compensation, or a higher risk premium, to buy UK assets. “All UK assets need to get cheaper if that risk premium is going up,” Cole says. The increase in risk premium can reflect concern that enough isn’t being done to contain inflation, as well as worries about the outlook for deficits. In the UK, rising bond yields are pushing up government spending on interest expense, which could put the government’s budget plans at risk. A weaker currency could also drive up inflation. In addition, Cole points out that investors are mindful that there have been other examples of the gilt yields rising alongside a decline in sterling. That’s what happened in 2016 after Britons voted to leave the EU, sparking a bout of higher uncertainty in financial markets. There was a similar episode in 2022 after the government, among other things, unveiled a budget plan with unfunded tax cuts (the event was amplified by vulnerabilities in the pension sector). Those episodes had an impact on policy making and interest rates. So far, the British pound’s depreciation on a trade-weighted basis is small compared to previous periods of gilt market stress that sparked policy changes for interest rates, according to Goldman Sachs Research. At the same time, the government has taken steps to make UK pensions less sensitive to fluctuations in gilt yields, and expectations for economic growth, inflation, and the deficit are more positive than in 2022. Those factors make it less likely that there will be a sharp move higher in interest rates that causes financial stability concerns, Cole says. The outlook for gilt yields in 2025 Goldman Sachs Research forecasts a decline in 10-year yields of almost a percentage point, and our analysts expect inflation to cool enough for the Bank of England to cut rates next month. “We’re fully aware that there is now slightly more fragility in that path toward the 4% mark,” Cole says. He points out that it all comes down to the data, and whether it allows the BoE to make a series of cuts below market pricing that will help the market absorb elevated bond supply. “What could go wrong, of course, is that inflation proves to be more persistent, or there is excessive currency weakness,” Cole says. “That’s important to note in the context of the strong recent US jobs report, and another bout of weakness in the pound. If that were to start to lead to more inflationary pressure, it could make it more difficult to get those interest rate cuts. But as it stands, we still think that the UK data will justify more cuts than the market is pricing.”

    Even as tariffs and other shocks are expected to rattle the global economy in 2025, India will likely remain insulated. Thanks to a strong push in manufacturing and infrastructure, the Indian economy is “buzzing with energy and optimism,” says James Reynolds of Goldman Sachs Asset Management. “With domestic consumption accounting for 70% of its GDP, India has historically been viewed as more vulnerable to high inflation,” says Reynolds , global head of direct lending. “However, India has in recent years performed better than various developed and emerging economies in relation to its inflation targets, largely a result of a stronger government, central bank, and improving financial system.” To get the pulse of the Indian economy, Reynolds, Stephanie Hui, head of private and growth equity in Asia Pacific for Goldman Sachs Asset Management, and Hiren Dasani, co-head of emerging markets equity for Goldman Sachs Asset Management, led a tour of clients and investors through three cities. The four-day tour included discussions with top corporate executives, up-and-coming start-up founders, and policymakers. We spoke with Hui, Dasani, and Reynolds about the prospects for India’s economy, the thrust in infrastructure and manufacturing, and the private equity sector’s view of India. Tell us a little more about the investor tour, and the overall mood you encountered. Hiren Dasani: It was 22 investors representing $4 trillion in assets under management as of November 2024 . The clients had come all over from all over the world: about 50% from the Americas, I would say, and about 25% from the EMEA region, and the remaining from the Asia-Pacific region. A very large proportion of the clients were public pension funds from the US and some of the largest family offices as well. I think the mood was very optimistic from a medium-term perspective, and that was evident from the meetings we did with corporate leaders. There’s a sense that India may be becoming more competitive on manufacturing. Historically, services was the main driver of consumption, but now manufacturing competitiveness has been more pronounced, especially in a world where many large corporations are looking to diversify their supply chain. “China plus one” is a theme that a lot of corporates like. What has led to this boost in manufacturing competitiveness? Hiren Dasani: Some of this is related to production-linked incentive schemes, which India has rolled out over the years. There are tax incentives if a company sets up new production capacity in India, with certain production targets: up to 5-6% of the value of the output for a certain number of initial years. Over and above that, I’d say there are more structural reforms like investments in renewable energy, which makes energy costs more competitive, and in logistics infrastructure. Stephanie Hui: The diversification of supply chains has been a key driver of India’s growth prospect. Prior to Covid, people were happy basically sourcing primarily from China for manufactured goods. However, with the disruptions from Covid and geopolitics, business leaders have increasingly sought diversification. Historically, India was more costly, but people are now saying that, if you need diversification, there’s more tolerance for higher costs and more patience for India to get up the learning curve. Unlike some smaller manufacturing markets, India has a large home base. So that the procurement power is such that, when you get to scale, it will likely become price competitive. I believe that’s the reason why there’s optimism that, if they can do dial up manufacturing, it may benefit India but may also benefit other international companies trying to risk manage. They had already, long ago, started sourcing IT services, so this is a continuation on that spectrum. How is the Indian government’s strong capex focus on infrastructure contributing to this story? James Reynolds: The government has significantly ramped up its capital expenditure on infrastructure, allocating a record 11 trillion rupees ($134 billion) on infrastructure spend for the fiscal year ending March 2025. In recent years, it has launched several large-scale projects in areas such as energy, urban development, transportation, digital infrastructure which includes expansion of highways, development of new airports, creation of smart cities, and investment in renewable energy. Hiren Dasani: We met one of the largest infrastructure companies in India, which has been involved in railway electrification, bullet train projects, airport buildouts, and so forth. And in all of them, they were highlighting that the pace of execution has picked up quite a bit. So just to give you some numbers: Data center capacity is likely to grow by a factor of six or seven in the next five years, we believe. And while India has built metro rail systems in 17 cities in the last 50 years, more than 20 cities at present are developing metro rail networks. Why are many Indian companies today focusing on vertical integration? Hiren Dasani: This is more true of startups, really. In developed countries, a startup founder gets many things on a platter, because the physical infrastructure and the overall ecosystem (including supply chain networks and pools of talented human resources) are typically better developed. So the founder can just focus on one thing and doing that extremely well. But in an emerging market like India, where the broader ecosystem is not that well developed, you might spend more time and resources in developing that ecosystem. Which leads you to be a little more vertically integrated. Stephanie Hui: I’d also add that there’s support from the government to move upstream. I’ll use an anecdote here. Historically, Indian manufacturing companies have imported major parts, primarily from China, and assembled locally. The software may have been Indian, but the hardware was primarily sourced from outside. But what we’re seeing right now is, for some products, a cap on the percentage of components coming from outside the country, versus being manufactured domestically. The government uses tax and other incentives to drive this change. The example that was quoted on our trip was HVAC systems: heating, ventilation, and air conditioning systems that people use. Historically you

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