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U.S. Economy Forecast to Slump 24% in Second Quarter at Goldman Sachs

- Goldman Sachs say recovery to be gradual
- Unemployment could peak at 9%
- Markets stumble as U.S. politicians fail to reach deal

Schumer

Above: Senate minority leader Chuck Schumer. Image © Senate Democrats, sourced under CC Licensing conditions

Economists at Goldman Sachs are forecasting a severe slump in the U.S. economy owing to the coronavirus outbreak, which is expected to lead to notable declines in the services, manufacturing and construction sectors.

GDP is forecast by the Wall Street investment bank to fall by nearly 10% in April, while the economic recovery will be slow with the negative impact of the coronavirus expected to fade "only gradually in later months," says Jan Hatzius, Economist at Goldman Sachs in New York.

Goldman Sachs now forecast quarter-on-quarter annualised growth rates of -6% in Q1, -24% in Q2, +12% in Q3, and +10% in Q4, leaving full-year growth at -3.8% on an annual average basis and -3.1% on a Q4/Q4 basis.

"Over the last few days social distancing measures have shut down normal life in much of the US. News reports point to a sudden surge in layoffs and a collapse in spending, both of which appear to be historic in size and speed. We are therefore making further large downward revisions to our economic forecast," says Hatzius.

The impact of the economic slowdown is expected to translate into higher unemployment rates and Goldman Sachs estimate a 5.5% increase in the U3 unemployment rate to a 9% peak in coming quarters.

The forecast for a -24% GDP reading for the second quarter is relatively conservative in contrast to that forecast by the St. Louis Federal Reserve whose President James Bullard said he sees a -50% GDP reading for the quarter.

Global stock markets remain pointed lower as investors sell exposure to equities in anticipation of a deep recession. Asian markets lead the way by trading in the red and were followed by European markets where the FTSE 100 is seen trading 3.7% lower and the Germany DAX is seen 4% lower.

S&P 500 futures opened lower but were closed within minutes after they fell 5% and hit the circuit breaker that automatically kills trading in order to limit disorderly moves.

"The reason for the crash this particular morning is that the U.S. government is unable to come up with a rescue plan. The U.S. Senate gave up trying to negotiate a bipartisan rescue bill on Saturday and the Republicans wrote it alone. It was unable to pass on Sunday," says Marshall Gittler, Chief Strategist at BD Swiss.

Politicians in the U.S. Congress failed to agree a deal on fiscal stimulus measures that amount to nearly $2tn after Republicans and Democrats reached an impasse, with Democrats saying the proposed deal offered big business an overly generous bailout with limited conditions.

They also argued it would not release enough new funds to hospitals. 

However Treasury Secretary Steven Mnuchin and Chuck Schumer, Senate's Democrat leader, signalled there was still room for a compromise.

Staff were working through the night to try to resolve the impasse and we would ultimately expect a breakthrough early this week, which could help stabilise markets.

However, a market recovery is ultimately dependent on the defeat of the coronavirus pandemic and we would want to see the death rate start to flatten in Western economies. Monitoring the infection rate is ultimately useless as it tends to be influenced by such factors as increased testing rates.

The other game-changer that could swing a market turnaround would be the announcement of a successful vaccine or treatment being found. On all the above, we are some way from a breakthrough and markets are likely to remain pointed lower.

"What will turn this round? Buyers will return in bigger numbers when we can see an end to the closures and a pathway to a more normal economy. This will require the authorities to succeed in controlling the spread of the virus, or a change of approach that allows greater economic activity. The latter option is easier once there is a vaccination to give more people immunity," says John Redwood, MP and Chief Global Strategist at Charles Stanley.

"In the meantime, the virus-induced stress looks set to accelerate trends already apparent to investors before the epidemic," adds Redwood.

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