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    As China’s economy sputters, investors are asking whether the country could repeat Japan’s experience in the 1990s. Goldman Sachs Research finds that even though there are some key similarities between the two situations, China’s “Japanification” is far from certain. While deteriorating demographics, a debt overhang, and an asset-bubble-burst were all important ingredients to Japan’s malaise at the turn of the century, a key contributor to its Japanification was a fundamental change in longer-term growth expectations, Goldman Sachs Research China Economist Hui Shan writes in the team’s report. She says growth expectations in China, which is also coping with worsening demographics, a debt overhang, and a deflating property market, are showing signs of a downward drift, but there are ways policymakers can avoid a Japanese-style slump. “The key to avoid such a negative feedback loop is to cut off the continued deterioration in longer-term growth expectations,” Shan says. She points out there are bright spots in the economy, including investment in electrical machinery in the manufacturing sector and an increase in making precession instruments and cars. Policymakers’ will have to manage the outlook for GDP growth as the world’s second-largest economy transitions from one of its important economic engines — property and infrastructure investment — to a new one based on upgraded manufacturing and self-reliance. “During this process, growth is expected to be soft before the new engine reaches a scale that is comparable to the old engine,” Shan says. Inflation will probably be muted because of the unfavorable demand-supply balance, and nominal interest rates will need to stay low to facilitate the deleveraging of the old economy. “These are mild symptoms of Japanification that will stay with China for at least a few years in our view,” she adds. How China compares to Japan in the mid-1990s By some measures, China’s situation looks even more dire than Japan’s did some 30 years ago, according to Goldman Sachs Research. For starters, China’s crude birth rate (the ratio between the number of live births in a year and the total mid-year population) has fallen further — it declined to 0.75% in 2022, considerably lower than Japan’s 0.99% rate in 1990 — and medical experts believe it may not have bottomed yet. Weakness in China’s housing sector also looks more pronounced. The urban residential property vacancy rate is around 20% in China, more than double the 9% rate that Japan endured in 1990, and housing prices are more stretched at 20 times household income in China, versus 11 times in Japan in 1990. Given that residential investment represents about twice the share of China’s GDP compared with Japan in 1990, “the direct impact from a housing slump to the real economy would be bigger in China than in Japan,” Shan says. That said, there are ameliorating circumstances that suggest China may be able to avoid a prolonged downturn. China’s property slump isn’t being accentuated by a stock market collapse, as was the case for Japan in early 1990, when plunging share prices severely damaged its banking system. China will likely continue to enjoy steady population growth in its urban centers, due to its still-low urbanization rate, even as its overall population declines. And, with a significantly lower GDP per capita, China’s economy also arguably has a higher potential growth rate than Japan in the 1990s, “which should make the deleveraging process less painful,” Shan says. In addition, healthy Chinese companies, unlike firms in Japan in the 1990s, aren’t reluctant to invest because their balance sheets are impaired, but rather because of regulatory tightening and policy unpredictability. Japanese banks were able to procrastinate in dealing with non-performing loans and provide forbearance lending to zombie companies. “The Chinese government does not face the same political costs that the Japanese government did, but its preference for commercial banks to absorb a large share of losses in property and local government implicit debt may nonetheless constrain their credit creation ability,” Shan says. The real reason for Japan’s economic stagnation Then there’s the question of just how much of Japan’s woes in the 1990s were tied directly to demographics. Businesses saw demographics exerting downward pressure on long-term growth expectations and pulled back on spending and increased saving, creating a negative feedback loop. In fact, most of the decline in Japan’s potential growth rate in the 1990s can be explained by the falling contribution of investment on worsening growth expectations, Shan says. By contrast, labor’s contribution played a relatively small role. “Deteriorating long-term growth expectations rather than deteriorating demographics were at the core of ‘Japanification,’” she says.  The latest data coming out of China suggests expectations have weakened materially over the past 18 months. Private investment, for example, stopped increasing after early 2022 and contracted outright in 2023. Likewise, consumer confidence plummeted during the Shanghai lockdown in April 2022 and has stayed depressed since. “The lack of coordinated and forceful policy responses has led many forecasters to downgrade their medium-term growth outlook for China,” Shan says. There are steps China can take to counter that pessimism, according to Goldman Sachs Research. The government could emphasize the importance of economic development, accelerate the restructuring of troubled property developers and local government financing vehicles, and strengthen social safety nets to encourage long run household consumption. They also caution that commercial banks shouldn’t be made to shoulder most of the loan losses during property deleveraging to protect their ability to extend new credit, among other steps to provide greater policy certainty. “Policy predictability and coordination are important for investment demand from the private sector,” Shan says. “The Chinese economy doesn’t have to follow Japan’s path in the 1990s.”

    India’s real GDP is expected to grow at more than 6% every year between 2023 and 2028, according to Goldman Sachs Research. In tandem, the wealth of affluent Indians is rapidly growing as well. By 2027, according to a report titled “The rise of ‘Affluent India’” by Goldman Sachs Research, this cohort of affluent consumers will increase from around 60 million in 2023 to 100 million people by 2027. We spoke to Arnab Mitra, an analyst who leads research coverage of Indian consumer brands, about his team’s research, their calculations and forecasts, and the characteristics of affluent Indians. What kind of data did you use to triangulate your definition of “affluent” Indians? We looked at the number of people who take a flight at least once a year; the number of people who order from food delivery services at least once a month; the number of people who file income taxes on sums of more than 1 million rupees ($12,046); the number of people who have credit cards and postpaid mobile connections. Whichever way we looked, it seemed that the unique number of people who use discretionary products and services is somewhere in the region of 50 or 60 million. Then we looked at the income pyramid, which tells us what the top 60 million people earn. It seems to be around an annual $10,000 per person. And how has that changed over time? From 2019 to 2023, the cohort has shown a compounded annual growth rate of about 12-13%. That is corroborated by the sectors I mentioned. So the number of credit cards has grown by about 14-15%, for example. The tax filings we looked at, for more than 1 million rupees — they were growing at about 19% One thing we see in your data is how the volume of household financial assets invested in shares has grown conspicuously since 2016. How else do we see the growth of this cohort in the dynamics of the Indian stock markets? It’s quite clear that companies that address this cohort exclusively, or largely, have been growing much faster than companies that address broad-based consumption. We compared companies in the same sector that cater to upper-income consumers versus a broader group. So in cars, for instance, we compared SUVs to other kinds of cars. Or we compared premium liquor and spirits brands to more mass-market brands. We also looked at hospital or watch companies that exclusively target affluent consumers. All these stocks—they’ve done significantly better in terms of returns. How do gold and stock holdings contribute to the wealth of these affluent Indians? We don’t always have clear data on gold ownership, although there is one government survey showing that 90% of gold is owned by people in the top 10% of India’s earners. With shares — before the pandemic, there were 41 million Indians with online stock trading accounts, and these people would have made a lot of money since then. Again, this syncs with the 60 million figure we postulate for affluent Indians. Now, of course, the number of Indians with such trading accounts has risen to more than 100 million. Can we say anything about the non-affluent Indians — the broader population, and how they’ve fared in this same period? Essentially, the drivers of consumption are different. Inflation impacts the non-affluent cohort more, because they have fewer savings. Even before the pandemic, rural growth in fast-moving consumer goods had slowed down. That possibly has to do with the fact that agricultural output prices have not increased much over the last five years. And there have been disruptions such as demonetization and the introduction of a new, nationwide goods and services tax, followed by the pandemic, which affected a higher number of small businesses and people in low-income segments. How will this cohort of affluent Indians grow? After having seen these growth numbers of 12-13%, we investigated whether any of the factors driving upper-income growth are changing. The wealth effect is, if anything, strengthening, because it kicks in with a little bit of a lag — when your stock holdings rise in value the first year, you don’t feel as good as when they rise for the third consecutive year. That’s when you start spending because you feel it’s a little more permanent. So we extrapolated the growth rate between 2019 and 2023, which is around 12-13%, into the next four years, expecting a cohort of 100 million by 2027. And if the wealth effect is strong, it could be even more.

  The UK’s 5.5 million small- and medium-size enterprises (SMEs) could be an answer to revving up the UK economy and reversing more than a decade of stalled productivity. A survey of UK small business owners who participated in the Goldman Sachs 10,000 Small Businesses (10KSB) program helps to lay out their views and asks on government policies, such as upskilling the workforce, which could improve worker efficiency and unlock £106 billion in private sector revenue and 88,000 new jobs. The survey is at the heart of Generation Growth: The Small Business Manifesto, which was produced by Goldman Sachs 10,000 Small Businesses in partnership with the Aston Centre for Growth; Saïd Business School, University of Oxford; and Seven Hills Communications. The survey of more than 550 alumni of the 10KSB program finds that these companies are, overall, optimistic about doing business in the UK and have embraced advanced technology like generative artificial intelligence surprisingly quickly. But these business owners also see areas where government support is greatly needed to help them be more efficient. The UK’s growth in productivity, which is critical for boosting wages and prosperity, has long lagged behind its peers. Since 2007, the increase in average annual productivity in the UK has languished at just 0.2%, compared to an average of 3.6% in the three decades following World War II. Britain’s SMEs can help reverse that trend. Right now, only about 36,000 of them qualify as “Productivity Heroes” — SMEs that are established (more than three years old) and are growing revenues faster than they are expanding their workforces, according to the report. During an average 12-month period, this group of businesses increased revenues by 196% and headcount by 29%. The country has had bursts of new, high-productivity companies in the past, such as the years just before the financial crisis or in the decades following World War II. Matching that performance again could have a profound impact on the UK economy, potentially increasing the number of “Productivity Heroes” by 22,000, helping to generate an additional £106 billion in revenues and 88,000 jobs. “Small businesses are the engines of UK growth and have the power to transform communities,” Charlotte Keenan, head of the Office of Corporate Engagement’s international responsibilities, writes in the manifesto. She points out that small businesses make up 99% of all private sector enterprises in the UK, 61% of employees, and 53% of sales turnover. Many alumni of 10KSB UK, an education and business support program, are already “Productivity Heroes” or are close to being one. That makes this community a rich resource of ideas to improve productivity — 71% of 10KSB UK alumni are increasing their sales turnover, and 73% are increasing their headcount. What can be done to improve productivity in the UK? The 10KSB UK respondents in the survey, overall, have a positive outlook: Some 68% say the UK is a good place to run a small business. 90% or more expect to grow revenue and headcount in the next three years. Even so, more than half (55%)  also say they are unable to find the talent they need, and only 12% believe the education system is equipping young people for the future of work. A large majority – 89% – believe enterprise skills should be embedded within the core secondary school curriculum. Surprisingly, only 5% say they would prioritize coding, natural sciences, and engineering skills; 19% say they are looking for talent with basic IT skills (like proficiency in Microsoft Office) and accounting and presentation skills. Small business owners also want to see the government work more closely with small businesses to support international recruitment and explore the potential for mutually beneficial visa waivers. They also believe small businesses should be a voice at the table when policymakers are developing any potential changes to employee rights. Improving SMEs’ access to financing The second priority of survey respondents for the next government is on improving small businesses’ access to financing. 58% say they would consider taking their companies public, and 44% of those say the UK is an attractive market for an IPO. But more than a third of those interviewed (37%) say they were unable to access the capital they need to grow their businesses. Small business owners’ recommendations include:   Increasing the range of government-backed and government-supported financing options specifically targeted at small businesses, such as specialized loan schemes and encouraging UK pensions to back SMEs Including a commitment to entrepreneurship as an area for spending in any implementation of a UK sovereign wealth fund Building a national campaign to increase SME leaders’ awareness of the existing financing options that they need to grow, especially for women and ethnic minority business owners who are currently underserved Other ways the government can support SMEs in the UK Many respondents (41%) say late payments from other companies have had an impact on their growth, and a majority (89%) say they would support tougher legislation for big businesses on late payments. When it comes to taxes, more than 90% support a discount on businesses rates for meaningful property improvement, and many support the idea of differential business rates depending on business sector (78%) and productivity potential (72%). When it comes to climate change, small business owners ask the government to view small businesses as key partners to help the UK meet its net-zero objectives. They say the government should investigate new ways of helping SMEs withstand changes in the energy market. And three quarters of respondents think the next government should establish and invest in a new publicly owned power generation company. In terms of AI, many firms are already familiar with this technology. 80% are either already specifically using generative AI tools such as Chat GPT or plan to start doing so in the next 12 months. Their policy recommendations include support to take advantage of the opportunity AI represents through education and financial incentives, and clear guidance on AI specifically aimed at small businesses. The survey results and findings of the report underscore that small

    US consumer spending is showing signs of slowing. But that’s more of a return to normal than an indication that a downturn is looming, according to Goldman Sachs Research. Some recent consumption data has appeared soft. Real personal consumption expenditure rose 2.6% in April from the same month a year ago, compared with a pace above 3% last year. Nominal retail sales increased by just 0.1% in May, while spending in prior months was revised down. Even so, Joseph Briggs, who jointly leads the Global Economics team in Goldman Sachs Research, says the US consumer remains healthy. In part, that’s because of relatively high levels of employment and household wealth, and low levels of debt. The team forecasts 2.5% real (inflation-adjusted) disposable income growth for the US consumer in the fourth quarter of 2024, year over year. The healthy outlook for the consumer is one of the reasons Goldman Sachs Research thinks the odds of a recession are still quite low — at about 15%, which is roughly the historical average. “A soft landing both for the consumer and the overall economy is clearly the most likely outcome,” Briggs says. We talked to Briggs about the state of the US consumer, why corporate America has been downbeat on consumption expenditures, and the outlook for the overall economy. How does slower consumer spending growth fit into your overall outlook? Spending growth has slowed from above 3% in the second half of last year to a trend rate of probably around 2% today. This is basically what we’re forecasting for 2024 overall. But I would consider this slowdown in the pace of spending growth as more of a normalization and not really a weakening. A 2% pace of real spending growth overall is basically in line with historical trends. It’s by no means a bad thing for the economy. This is roughly what we’d expect, given where we are in the current cycle — a normalization from an unsustainable pace in the second half of last year. Is the labor market still a positive for the consumer? We’ve rebalanced from an extremely tight labor market to a labor market that’s still fairly tight by historical standards. By most tightness measures, we’re at, or maybe a touch below, where we were in 2019. But to keep perspective, 2019 was considered the hottest labor market in postwar US history. I expect the labor market to be a big driver of income growth and therefore spending for the rest of 2024. So it will be pretty good for the consumer. Our forecasts are still for about 175,000 job gains per month for the rest of this year. We’re expecting that wage growth is going to slow to only 3.5% by year-end. What this means is continued job growth and strong real wage growth should support real household cash flows.  To be sure, the labor market is also our biggest downside risk. Any incremental deterioration would probably lead to a weaker consumer outcome. To put some numbers around that, our research tells us that each percentage point rise in the unemployment rate lowers overall spending growth by about 0.6 percentage points. This is driven by a 1.2 percentage point pullback for bottom income households but only a 0.4 percentage point pullback for top income households. Are household balance sheets in good shape? They are. Going back to 2019, prior to the pandemic, we’ve seen a 50% increase in home prices and a 70% increase in equity prices. It’s hard to have a bad balance sheet outcome following these types of asset price gains. If you take our standard wealth effects model that tries to translate asset price changes into spending growth, we estimate a 0.3 percentage point boost to spending over the next year, versus about a 0.1 percentage point drag on spending over the last year. So we view this as an incremental source of strength and a driver of spending in 2024. What do you make of comments from companies about a consumer slowdown? There’s been quite a divergence between the way companies have viewed the consumer and what the macro data have shown for maybe the last year and a half. This divergence certainly accelerated in the first quarter, when a lot of companies called out that weakness. It’s a bit of a puzzle, and there are probably a number of reasons that contribute to this divergence. First, publicly traded consumer companies tend to have more of a skew to the lower-end consumer relative to overall spending. Even though we’re not seeing lower-income households as worse off, we’re certainly not seeing them as a source of strength to drive above-trend spending growth. Second, consumer-facing companies with exposure to the housing-related spending have probably experienced headwinds recently, given that the housing market has slowed significantly due to higher rates. A third point is that disinflation, particularly for goods prices, makes year-over-year nominal comparisons are a little bit more challenging. I think that has probably lowered revenue growth reported by some public companies. The last reason for the divergence is that services spending has outperformed goods spending over the last year, and consumer service companies skew more toward small businesses than the large public companies that are featured heavily in earnings calls and reports. What might change your views on the consumer or upset your forecasts? I don’t really see a lot of upside risk to our base case from here. There’s no clear catalyst that would prompt an acceleration in spending growth back to 3% or 4%. Saving rates are already low. There’s no fiscal expansion coming in the next couple of quarters that would provide a boost to spending. I don’t think the labor market is going to accelerate again from here and cause job growth and wage growth to rise above their recent trends.  At the same time, though, I think the case is pretty strong for the consumer to continue at a roughly on-trend pace of spending growth, say 2% to

    The growth in women’s contributions to the labor force in recent decades is difficult to overstate, and it’s transforming economies around the world. But much remains to be done. Goldman Sachs Research first published a report on women’s participation in the labor force, and the economic possibilities opened up by greater participation, in 1999. The report was led by our then-head of Japan Portfolio Strategy, Kathy Matsui, and titled Womenomics: Buy the Female Economy. Twenty-five years on, Goldman Sachs Research’s Sharon Bell, senior strategist on the European Portfolio Strategy team, and analyst Yuriko Tanaka take a fresh look at those issues on a global scale, in a new report called “Womenomics: 25 Years and the Quiet Revolution.” They find that women’s labor-force participation has grown across many developed economies. (Listen to our Exchanges podcast on women in the global workforce.) Joining the workforce has offered improvements in welfare and opportunity for women, but it has also had an enormous economic impact. Italy’s workforce, for example, would have shrunk if not for greater participation from women. In Japan, women’s growing share of jobs, even as the population shrinks, has kept the labor market stable. What has driven these changes? In previous work, Goldman Sachs Research has shown that family-friendly benefits and policies improve female participation in the workforce, as do changes in legislation on worker protection. More women are highly educated and skilled than ever before, and society and investors now have a greater focus on corporate diversity. Of course, there is still plenty of progress to be made. The propensity to work is lower for women than for men, particularly in emerging markets. And women are more likely to do part-time jobs. Some of these differences may also account for the gender pay gaps that persist, given that part-time work tends to be lower paid. Non-paid work, such as family caregiving, is a major barrier to women’s participation in the workforce, and to equality more generally, including the ability to reach the top echelons in corporations, academia, or politics. Non-paid work takes up a larger share of a woman’s day in every country. A commonly voiced worry is that as more women work, families find it more challenging to raise children, which reinforces the trend toward lower =birth rates. But the link between women’s workforce participation and birth rates isn’t strong. In recent years, if anything, there has been a modest positive relationship between the two. Perhaps because of better availability of childcare or equality legislation, it is increasingly becoming a social norm, especially in developed economies, for women to work and have children. In fact, as birth rates fall dramatically almost everywhere, and as aging populations become a growing source of concern for governments and investors, women’s labor-force participation is more critical to the global economy than ever. In the absence of a major productivity boost, if economies aren’t to shrink, they will need higher participation by women, older workers, or both. Continued migration may be part of the solution. But UN forecasts, which project shrinking working-age populations in many countries, already assume migration patterns of recent years will continue. Meanwhile, as more women join the labor force, the gender pay gap has edged lower more or less everywhere. Part of the reason the pay gap persists is that women and men tend to do different jobs, have varying levels of experience, and work different hours. But even so, the European Commission reports, the “largest part of the gender pay gap remains unexplained in the EU and cannot be linked to worker or workplace characteristics such as education, occupation, working time, or economic activity.” Women have made significant progress with respect to labor force participation, pay gaps, and leadership roles. But the scarcity of women in the most senior ranks of firms, and especially at the executive level, is notable and persistent. The ratio of women diminishes higher up in the power structure of companies. European companies have had undoubted success in bringing women into their boardrooms: Women make up almost 40% of the average STOXX Europe 600 board. This has been achieved by a combination of quotas (as in Norway, France, Germany) and soft pressure (such as attention from the media). That said, while a focus on boardrooms in Europe has yielded an improved representation of women at that level, that hasn’t been the case at other levels, such as executive director or CEO. While the share of female CEOs is increasing, the base is low and the numbers remain small. Different sectors show different rates of progress (or lack thereof) on employing women. In Europe the share of women in construction and in the sciences has risen in recent years (for construction, it’s from a low base) whereas it has fallen for tech. In the US, the share of women employees in technology and financial services (high-paying industries) has fallen. While much remains to be done, there are reasons to expect women’s participation in the workforce, as well as pay and opportunities at the highest ranks, to continue to increase. Women’s participation fell during the pandemic but has generally more than recovered since. While pay gaps are high in older age groups, even here the gaps have narrowed slightly, and there is a steady climb on most corporate-related metrics.

    Download Video Transcript How can investors use currencies to hedge against the risk of a US recession? Teresa Alves of Goldman Sachs Research separates the signal from the noise.