Global Economics AnalystLanding the Plane14 November 2018 | 11:00AM ESTn The global economy looks poised to slow moderately from 3.8% in 2018 to 3.5% in 2019, led by deceleration in the US and further softening in China. But with growth still above potential in most DM economies, we look for continued labor market tightening, gradually rising core inflation, and in many cases higher policy rates. n Our Fed call remains hawkish relative to the market, with five more 25bp hikes to a terminal 3-3% funds rate at the end of 2019. While higher rates and tighter financial conditions should help slow growth to its potential rate over the next year, we expect a decline in the unemployment rate to 3% and a rise in core inflation to 2% by early 2020. n We think concerns about the global impact of tighter Fed policy are overdone. Spillovers to EM are real, but the market has already priced 11 of the 13 hikes we expect for this cycle, so most of the adjustment to more normal US interest rates is probably behind us. The main risk to this view is a more substantial US overheating that eventually forces steeper rate hikes. n China has slowed quite sharply in 2018, on the back of slower credit growth and fears about a more damaging trade war. With monetary and fiscal policy now in easing mode, we expect only a modest further deceleration. The macro impact of increasing tariffs is also likely to remain manageable, even under our call for some further escalation in early 2019. n Although growth in Europe and Japan has decelerated in the course of 2018, it remains above trend. This should put further downward pressure on the unemployment rate and keep the recent upward trend in wage growth intact. However, with core inflation still far below the target, the Italian budget crisis unresolved, and Brexit negotiations ongoing, the risks to our forecasts of a first hike in the ECB deposit rate in Q4 2019 are tilted to the later side. n Beyond 2019, the risk of a global recession is likely to rise as more and more DM economies move beyond full employment. However, even in subsequent years recession is not our base case. Financial imbalances still look very limited, and the flatter and more anchored Phillips curve has reduced the need for central banks to reverse an overshooting of full employment quickly.Jan Hatzius+1(212)902-0394 | jan.hatziusgs.com Goldman Sachs & Co. LLCSven Jari Stehn+44(20)7774-8061 | jari.stehngs.comGoldman Sachs InternationalNicholas Fawcett+44(20)7051-8321 | nicholas.fawcettgs.com Goldman Sachs InternationalSoeren Radde+44(20)7774-1105 | soeren.raddegs.com Goldman Sachs InternationalManav Chaudhary+44(20)7051-3063 | manav.chaudharygs.com Goldman Sachs InternationalInvestors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Goldman SachsGlobal Economics AnalystLanding the PlaneWhen the books are closed on 2018, it should look like a pretty good year for the global economy. Real GDP growth is on track for 3.8%, which is above potential if not quite as firm as suggested by the high-frequency indicators early in the year. The laggard economies in Europe and Japan saw further progress in the labor market, with ongoing strength in employment and declines in the unemployment rate. And the renewed “lowflation” concerns of 2017 have subsided on the back of stronger wage growth across the advanced economies and a rebound in US core inflation.But the high-water mark on growth is probably behind us. As shown in Exhibit 1, we now expect global GDP to grow by 3.5% in 2019, with softer numbers across most DM economies as well as China. In most places where we have reliable supply-side estimates, our forecasts remain above potential, although the annual average numbers overstate the strength in cases such as the US where we see growth slowing through the year.Exhibit 1: Our Global Growth OutlookReal GDP Growth Percent Change yoy201620172018 (f)GSCons*2019 (f)GSCons*2020 (f)GSCons*USJapanEuro Area GermanyFranceItalySpainUKChinaIndia*RussiaBrazil1.6 1.01.92.21.11.03.31.8 6.77.9-0.2-3.52.2 1.72.52.52.31.63.01.7 6.96.31.51.02.9 0.91.91.71.61.02.51.3 6.67.51.71.22.9 1.12.01.81.61.1 2.6 1.3 6.6 7.4 1.81.42.5 1.01.61.91.70.42.31.5 6.27.31.82.62.6 1.11.71.71.71.0 2.3 1.5 6.2 7.5 1.52.31.6 0.61.61.61.61.1 2.1 1.4 6.1 7.9 2.83.01.9 0.61.51.51.60.9 1.9 1.66.0-1.72.6Developed Markets Emerging Markets1.74.52.45.12.45.12.45.12.14.72.14.91.75.31.75.1World3.13.83.83.93.53.63.63.6* Bloomberg c