Goldman Sachs Group, Inc. (GS.US) 2027 Macro Outlook: Global Economy to Pick Up Slightly but the Road Will Be Bumpy, with Downside Risks Not to Be Ignored

Goldman Sachs Group, Inc. (GS.US) 2027 Macro Outlook: Global Economy to Pick Up Slightly but the Road Will Be Bumpy, with Downside Risks Not to Be Ignored The global economy has shown greater-than-expected resilience after weathering the shock of the 2026 Iran war, but Goldman Sachs Group, Inc. (GS.US) warns that the growth path in 2027 will be bumpier, with the balance of risks clearly tilted to the downside. The 2027 macro outlook report, led by Goldman Sachs Group, Inc. Chief Economist Jan Hatzius, forecasts that global GDP growth will edge up to 2.8% from 2.7% in 2026, slightly above potential growth. The report's core judgment is that energy price normalization and continued strong AI capital expenditure will provide the main support, but tighter financial conditions and fading fiscal stimulus will offset these, resulting in an overall growth picture that is "solid but unspectacular." At the same time, Goldman Sachs Group, Inc. explicitly identifies three major downside risksa renewed escalation of the Iran situation, bond market turmoil, and the AI investment cycle peaking earlyand believes the challenges facing markets will be more severe than the macroeconomy itself. On the monetary policy front, Goldman Sachs Group, Inc. expects the Federal Reserve to raise rates once each in December and next March, and the European Central Bank to deliver its final rate hike in December, after which both central banks will pivot to rate cuts by the end of 2027. Goldman Sachs Group, Inc.'s rate forecasts are overall more dovish than market pricing, a judgment that is potentially positive for both equities and bonds. On asset allocation, Goldman Sachs Group, Inc. maintains its baseline forecast of positive returns for equities and bonds, but emphasizes that as the market cycle matures, the probability of rising volatility is greater than that of falling volatility, and recommends investors strengthen hedging and diversification. Growth Drivers Shifting: Energy Turns into a Tailwind, AI Investment Remains the Main Engine In 2026, surging AI capital expenditure, loose financial conditions, and fiscal expansion in economies such as the US and Germany largely offset the energy supply shock triggered by the Iran war, and the global economy achieved 2.7% growth, only 0.1 percentage point below Goldman Sachs Group, Inc.'s previous forecast. Taiwan, China and South Korea significantly outperformed due to surging AI exports, beating expectations by 8.6 percentage points and 1.9 percentage points respectively, while the US and the euro area slightly underperformed. Looking ahead to 2027, the energy price shock is expected to shift from a headwind to a tailwind. Goldman Sachs Group, Inc.'s commodity strategists' baseline forecast shows Brent crude falling to US$78/barrel by the end of 2027, with global LNG prices normalizing in tandem, and the drag from energy prices on global growth shifting from 0.4 percentage point in 2026 to a slight boost. AI capital expenditure remains the most important growth engine. Goldman Sachs Group, Inc. forecasts that global nominal AI investment will rise from US$1.1 trillion in 2026 to US$1.8 trillion in 2027, with the increment mainly coming from an increase of more than US$500 billion in US hardware spending. AI investment will contribute about 0.4 percentage point to global GDP growth, including an estimated contribution of 0.6 percentage point to US "true" GDP growth after adjusting for the statistical undercounting from excluding semiconductor investment and chip-related intellectual property exports. On fiscal and financial conditions, the Goldman Sachs Group, Inc. GS Financial Conditions Index (GS FCI) has tightened by about 50 basis points in the US and about 30 basis points in developed markets over the past three months, which will exert a moderate drag on growth in the coming quarters. The marginal effect of fiscal expansion is also fading, with the main exception being Japanthe consumption tax cut, increased defense spending, and the Takaichi government's investment plan are expected to provide a 0.7 percentage point boost to Japan's GDP growth. Among major economy forecasts, Goldman Sachs Group, Inc. holds a relatively optimistic view on US economic growth, forecasting 2.4%, above the consensus of 2.2%, while being more pessimistic on Europe, forecasting 0.9%, below the consensus of 1.3%, mainly because tighter financial conditions and elevated energy prices will begin to show this winter. Three Major Downside Risks: Energy, Bond Markets, and the AI Cycle Goldman Sachs Group, Inc. explicitly characterizes 2027 global growth risks as skewed to the downside and lists three main channels. Renewed escalation of the Iran situation. Beyond its baseline forecast, Goldman Sachs Group, Inc.'s commodity strategists assign greater weight to an upside scenario in which intensified shipping attacks, damaged oil infrastructure, and a more persistent risk premium could push oil prices up to US$132/barrel. If this scenario materializes, the energy price shock will continue to drag on global growth in 2027, and unlike 2026, financial conditions and fiscal policy will by then be unable to provide the same degree of offset. Bond market turmoil. Developed market yield curves are currently about 85 basis points higher than at the start of 2026. Goldman Sachs Group, Inc. estimates that if this increase persists, it will cumulatively drag on GDP by about 0.5% through housing, durable goods, and corporate investment channels. France's fiscal risk is particularly prominentthe 10-year French government bond (OAT) yield is about 150 basis points above German bunds, and fiscal health indicators have flashed red. Goldman Sachs Group, Inc. expects that substantive fiscal consolidation discussions will not begin until after France's April 2027 presidential election and June parliamentary elections, but markets may pressure ahead of time, creating a larger growth drag. Weakening AI investment shock. Goldman Sachs Group, Inc. notes that hyperscaler stock price reactions to signals of higher capital expenditure on earnings calls have shifted from positive in 2024-2025 to slightly negative in 2026, as the market begins to worry about overinvestment. In addition, the magnitude of capex upgrades by hyperscalers during the third-quarter earnings season slowed, indicating that the peak of the AI investment cycle is coming into view with increasing clarity. Regarding AI's impact on the labor market, Goldman Sachs Group, Inc. has observed early signals: in non-manufacturing industries, there is a statistically significant negative correlation between AI adoption in routine business functions and employment growth, and a positive correlation with the unemployment ratea correlation that was not significant at the start of the year. Goldman Sachs Group, Inc.'s baseline forecast holds that AI's impact on the labor market will be concentrated mainly in 2028-2029, but if the economy turns down, companies may cut hiring targets more aggressively, accelerating this process. Inflation: Progress Expected, but Upside Risks Remain 2026 inflation exceeded expectations, mainly due to energy price increases triggered by the Iran war, with global headline inflation ending at 3.7% on a Q4 year-on-year basis, 1.3 percentage points above Goldman Sachs Group, Inc.'s previous forecast. Looking ahead to 2027, Goldman Sachs Group, Inc. believes conditions for inflation to decline are forming. In the US, the tariff pass-through effect (currently still contributing about 40 basis points to core PCE year-on-year growth) is expected to fully exit the year-on-year statistics next spring, and combined with the fading of the Iran war inflation shock, Goldman Sachs Group, Inc. forecasts that US core PCE inflation will slow from 3.2% at end-2026 to 2.4% at end-2027. However, inflation may remain somewhat sticky in early 2027. Goldman Sachs Group, Inc. cites three reasons: The pass-through effect of higher energy prices will continue into next year, particularly evident in Europe, where for example European airfares have not yet fully reflected higher fuel costs; Global memory price forecasts were revised up again last earnings season, which will provide an additional boost to core inflation, with the US affected especially; Upstream cost pressures have risen and spread somewhat, and historical patterns suggest this will keep inflation overshoot risks elevated through next spring. Goldman Sachs Group, Inc. also notes that if the Iran situation escalates again, according to its commodities team's adverse scenario, 2027 headline inflation would be 0.9 percentage point above baseline and core inflation 0.2 percentage point above baseline. Monetary Policy: Rate Hikes Nearing an End, Rate Cut Path Gradually Clearer Goldman Sachs Group, Inc. expects the Federal Reserve to raise rates once each in December and next March, then begin cutting rates in December 2027 and cut three more times in 2028, with a terminal rate of 3.25% to 3.5%. Goldman Sachs Group, Inc. believes US rate risks are skewed dovish, because US inflation drivers are more clearly temporary and the US has the greatest exposure to a downturn in the AI cycle. For the European Central Bank, Goldman Sachs Group, Inc. expects a final rate hike in December, followed by normalization rate cuts beginning in Q4 2027, with a terminal rate of 2.25%. The Bank of England is expected to deliver its final hike to 4.25% next February, remain unchanged thereafter, and delay cuts to a terminal rate of 3.25% until 2028. Goldman Sachs Group, Inc.'s forecasts for both the ECB and BoE are more dovish than market pricing. Japan is the main exception. Goldman Sachs Group, Inc. expects the Bank of Japan to raise rates by another 25 basis points at its December monetary policy meeting, and to continue raising rates in March and June next year, reaching a terminal rate of 2.0%, citing upside inflation risks and pressure on the yen from high global interest rates. In emerging markets, Goldman Sachs Group, Inc. holds an overall dovish stance, expecting most central banks in Central and Eastern Europe, the Middle East, Africa, and Latin America to cut rates in 2027, while Asian rates remain broadly flat or rise slightly. Market Outlook: Positive Returns Expected, but Volatility Risks Increase Goldman Sachs Group, Inc.'s baseline forecast shows both equities and bonds delivering positive returns in 2027, with commodity returns near zero. But Goldman Sachs Group, Inc. also warns that the challenges facing markets will be more severe than the macroeconomy itself. For equities, Goldman Sachs Group, Inc. expects S&P 500 earnings growth to slow from 36% in 2026 to 11% in 2027, still solid, but the slowdown means market concerns about the AI investment cycle peaking will gradually intensify. Goldman Sachs Group, Inc. notes that the AI investment boom's contribution to corporate earnings and market capitalization is far greater than its contribution to GDP growththe ratio of S&P 500 earnings to GDP has hit a record highand once the investment shock fades, the market will face the question of whether this high earnings share can be sustained. On regional allocation, Goldman Sachs Group, Inc. recommends overweighting the US and Japan, neutral on Asia ex-Japan and emerging markets, and underweighting Europe. For credit markets, Goldman Sachs Group, Inc. expects credit spreads to widen further in 2027, with US high yield underperforming, and tail risks from weaker borrowers potentially triggering broader financing market turmoil. For bond markets, Goldman Sachs Group, Inc. believes real yields are at near-30-year highs and bonds' hedging value is gradually recovering. As growth risks rise in the second half of 2027 and the central bank hiking cycle nears its end, the negative correlation between bonds and equities is expected to re-emerge. Goldman Sachs Group, Inc. forecasts the US 10-year Treasury yield will fall to 4.6% by end-2027. For currencies, Goldman Sachs Group, Inc.'s baseline forecast is for a modestly weaker dollar, with the renminbi continuing to appreciate on the back of trade surpluses. If market doubts about US tech stock "exceptionalism" accelerate, the dollar could fall more sharply, while the yen would appreciate significantly on safe-haven demand. On commodities, Goldman Sachs Group, Inc. recommends using them as portfolio hedging tools, with European natural gas futures and TTF call options serving as asymmetric hedges against upside energy price risks. In addition, Goldman Sachs Group, Inc. believes that as the market cycle matures, equity index volatility is more likely to rise than fall, and recommends investors consider seeking deeper protection through out-of-the-money put options or replacing equity holdings with long-dated call options. This article is reposted from "Wallstreetcn," author: Li Dan, GMTEight editor: Li Cheng