Peak oil demand is a decade away

China's equities rebound. # # --------------------------------------------------------------- The key takeaways today: - Peak oil demand is still a decade away - What slowing US consumer spending means for GDP - Will the rebound in Chinese stocks continue? - Two European elections — and their economic impacts - How Procter & Gamble's CEO plans to use AI - Briefings Brainteaser: Which state is the data center capital of the US? Was this newsletter forwarded to you? [Sign up now](. --------------------------------------------------------------- Peak oil demand is still a decade away The demand for oil is expected to rise over the next decade, amid lackluster electric vehicle sales and sustained global economic growth, according to Goldman Sachs Research. “We think peak demand is another decade away, and more importantly, after the decade it takes to peak, it plateaus, rather than sharply declines, for another few years,” write Nikhil Bhandari, co-head of Asia-Pacific Natural Resources and Clean Energy Research, and analyst Amber Cai [in the team's report](. In its baseline scenario, Goldman Sachs Research expects oil demand to peak at 110 million barrels a day by 2034. In a scenario with slower EV adoption, oil demand could keep increasing towards 113 million barrels a day by 2040. Bhandari and Cai note that the growth will be driven by demand for petrochemicals (chemicals derived from oil used to manufacture plastics, soaps, and other items) and specialized refined products like jet fuel. Listen to Goldman Sachs Research's Daan Struyven and Nikhil Bhandari discuss the factors shaping the oil market on [Goldman Sachs Exchanges](. --------------------------------------------------------------- Is US consumer spending losing momentum? US consumer spending is showing signs of slowing. Real personal consumption expenditure rose 2.6% in April from the same month a year ago, compared with a pace above 3% last year. But that's more of a return to normal than an indication that a downturn is looming, [says Joseph Briggs]( who jointly leads the Global Economics team in Goldman Sachs Research. Consumers are supported by a strong job market, rising household wealth, and relatively 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. Briggs points out that the US labor market has rebalanced from being “extremely tight” to “still fairly tight by historical standards.” Goldman Sachs Research forecasts 175,000 job gains per month for the rest of this year. He identifies the job market as being the biggest risk to those forecasts. Goldman Sachs Research finds that each percentage point rise in the unemployment rate lowers overall spending growth by about 0.6 percentage points. 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. --------------------------------------------------------------- Will the rebound in Chinese stocks continue? Since the Lunar New Year, China's equity markets have showed signs of a comeback, suggesting that a recovery of confidence in the broad economy as well as the equity market, albeit slow, is seemingly under way. We spoke to [Christine Pu and Nathan Lin]( co-heads of China equity for Goldman Sachs Asset Management, for their thoughts on China's economy and markets. How do you view earnings and valuations? We believe earnings and valuations remain attractive and, in our view, have potentially priced in the current backdrop. One-year forward multiples for the CSI300 and MSCI China indices stand at 11.6x and 9.6x, well below their historical averages. Earnings are on path to recovery for the CSI300 (Goldman Sachs' top-down estimate being 9% / 11%) and MSCI China Index (8% / 10%) for 2024 and 2025 respectively, in local currency terms. Pivoting to your portfolios, where do you see opportunities? We continue to adopt a bottom-up approach in identifying quality companies. We see potential opportunities of China's equity market in four key categories: - Advanced manufacturing: China increasingly dominates the global industrial robot market and EV production, with a market share greater than 50%. We continue to see rich potential opportunities in the space given the government push for technology upgrade and modernization of the industrial system. - Technology innovation: In real terms, China's spending on research and development (R&D) has grown to $669 billion in 2021, according to the most recent data from the OECD, rapidly narrowing its gap with US. We expect to see the rise of more companies leading in IT or healthcare industries with innovation. - Resilient consumption: Funding for urbanization, equipment upgrades, and consumer durable trade-ins has the potential to improve domestic demand. We like leading home appliances companies and cross-border e-commerce players that leverage China's competitive supply chains. - High-yield dividend opportunities: We believe these remain an attractive and arguably more defensive opportunity. Given macro uncertainties, we think companies with more stable free cash flows and good shareholder returns look attractive. In case you missed it: Listen to our [Exchanges podcast]( on China's rebound. --------------------------------------------------------------- How election results will ripple through the French and UK economies The second round of the recent French legislative elections delivered a hung parliament, and the next step is for President Emmanuel Macron to appoint a prime minister tasked with forming a government. While much remains in flux, Goldman Sachs Research economist Alexandre Stott predicts that the previously expected budget tightening this year will not fully materialize, and that next year's deficit will be larger than previously assumed (4.7% of GDP, compared with 4.4% before). The implications of the elections for near-term growth are probably slightly negative, according to Goldman Sachs Research. The tightening in financial conditions and rise in policy uncertainty are likely to more than offset the fiscal boost from a slower pace of deficit reduction. Goldman Sachs Research shaved its French growth forecast for the fourth and first quarters by 0.1 percentage point each. That said, the parliament has shifted less to the right than projected, leaving mainstream parties (Ensemble, Les Republicains, Parti Socialiste) as the center of gravity of the new parliament, writes economist Simon Freycenet. Given the center likely has enough weight to block the more expansionary fiscal policies, Goldman Sachs Research sees room for the additional yield from 10-year French government bonds (relative to similar-maturity German debt) to compress by as much as 10 basis points into the summer. By contrast, Goldman Sachs Research raised the UK's growth forecast following Labour's landslide election win. Chief European Economist Sven Jari Stehn writes that while Labour has pledged to stick to the same fiscal rules as the outgoing government, he expects somewhat more spending (£24 billion, or 0.8% of GDP) and somewhat higher taxes than is currently planned. After a prolonged period of stagnation, UK economic growth turned the corner this year with real (inflation adjusted) GDP up 0.7% in the first quarter and real GDP growth tracking at 0.6% for the second quarter. Stehn's team expects rising household incomes and a diminishing headwind from higher interest rates to support growth in the second half of the year. Goldman Sachs Research forecasts real GDP growth of 1.1% in 2024 and 1.6% in 2025, each 0.4 percentage points above the consensus. --------------------------------------------------------------- How Procter & Gamble's CEO plans to use AI Jon Moeller (L), CEO of Procter & Gamble, talks to Ashish Goyal of Goldman Sachs Asset Management Jon Moeller, Procter & Gamble's CEO, says artificial intelligence tools can help the company create significantly better products — and to create delight. “The outcomes are consumer, customer, employee, societal, and shareholder delight, period,” Moeller said [in an interview at The Forum]( with Goldman Sachs Asset Management. “If AI helps us drive those outcomes better and sooner, we should embrace it. If it doesn't, it's not as important to me.” Even as Moeller described how AI may speed up processes that take a lot of employee hours today, he suggested AI is unlikely to lead to lower employment. “Probably the reverse is true,” he said. “If you have tools that make people more effective and more efficient, those people become more valuable.” Moeller, who was Procter & Gamble's CFO before he became CEO, compared what's happening with the implementation of new AI tools to what happened in financial and accounting realms with the adoption of spreadsheets several decades ago. Employees in financial roles could suddenly do things they had never been able to do before, he said, “and we hired more of them.” In case you missed it: Read our outlook on [AI and productivity here](. --------------------------------------------------------------- Briefings Brainteaser: Data central The AI revolution will need powerful new data centers — and the electricity to keep them running. Which US state is the data center capital of the country, driving more power demand from data centers than the next five biggest markets put together? A) California B) Virginia C) Arizona D) Illinois [Check the answer here](. --------------------------------------------------------------- Goldman Sachs in the news By clicking on these links, you will be redirected to external websites that Goldman Sachs does not own or operate. Goldman Sachs is not responsible for the products, services, or content provided on those sites. Please refer to each external website's terms, privacy and security policies for details. [CNBC]( Jul 5 Fed "most likely" to cut interest rates in September, says Goldman Sachs' Jan Hatzius (3:53) --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. 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