Goldman Sachs cuts US GDP quarterly estimates on surging COVID-19 cases

  • Spiking COVID-19 cases and slowing economic activity have led Goldman Sachs to cut its near-term growth forecasts.
  • US gross domestic product will grow 3.5% in the fourth quarter, down from the previous forecast of 4.5%, said economists led by Jan Hatzius. The bank’s first-quarter 2021 growth estimate was also lowered to 1% from 3.5%.
  • Still, the winter drag should give way to a bigger rebound on the back of vaccine distribution, the bank said. Forecasted second-quarter growth was revised to 9.5% from 7%. Third-quarter growth was lifted to 7% from 6%.
  • Goldman also expects the Federal Reserve to extend the average maturity of its asset purchases in December to further support the economic recovery.
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Goldman Sachs has cut its US growth forecasts for the next two quarters, pegging their gloomier outlook on the “rapid and broad-based resurgence of the coronavirus.”

The bank lowered its fourth-quarter gross domestic product forecast to 3.5% from 4.5%. Growth in the first quarter of 2021 will slow to just 1% from the prior estimate of 3.5%, the team added.

The third wave of infections and cities’ implementation of new lockdown measures cuts into an already weakening economic recovery, economists led by Jan Hatzius said in a note to clients. Data from virus-sensitive sectors show “clear signs of a growing hit,” according to the team.

The US sits squarely in its worst phase of the coronavirus pandemic yet. New cases totaled 150,098 on Sunday, bringing the 7-day average to 167,568, according to The COVID Tracking Project. Total deaths neared 250,000, and the number of Americans currently hospitalized with COVID-19 hit 83,782.

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“The public health and economic situation is likely to get worse before it gets better, in our view,” Goldman said, adding that various high-frequency indicators of consumer activity show an economic slowdown coinciding with “the national deterioration in public health.”

Still, the bank expects the period of weakness to give way to stronger-than-expected growth over the next two years. A bigger economic hit in the winter “should imply an even larger reacceleration on the back of mass immunization,” the economists said.

Chances of vaccine distribution in early 2021 continue to improve. AstraZeneca and the University of Oxford announced Monday that their candidate was 70% effective at protecting trial patients from COVID-19. The late-stage trial data sets the candidate up as a third potential COVID-19 shot after Moderna and Pfizer and BioNTech’s.

Hope for near-term vaccine approval led Goldman to lift its mid-2021 projections. Forecasted second-quarter growth improved to 9.5% from 7%. Third-quarter GDP is expected to grow 7%, the bank added, up from the previous 6% estimate.

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The virus and stimulus talks present the two biggest near-term risks to the bank’s outlook. Failure to pass new fiscal support in early 2021 or the use of stricter lockdown measures could force the economy into a first-quarter contraction, the team said.

Goldman also adjusted its forecast for December’s Federal Open Market Committee meeting. Central bank policymakers were already expected to keep interest rates near zero and maintain their pace of asset purchases. But Goldman’s economists see weaker winter conditions as a big enough threat for the bank to extend the maturity of its asset purchases. Buying longer-dated Treasurys places greater pressure on long-term interest rates and, in turn, stimulates demand for interest-sensitive goods.

With economic activity worsening through the end of 2020, Fed officials are expected to extend the maturity of its asset purchases and introduce a timeline for the purchase program, Goldman said. The FOMC meeting is scheduled for December 15 and 16.

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