Goldman Sachs Bullish on US Economy, Predicts 19 Percent Growth in Q3

Analysts at investment banking and financial services giant Goldman Sachs believe that U.S. economic activity has likely reached its lowest point and is primed to take off in the third quarter, according to a report (pdf) published this week.

Furthermore, the market-making bank stated in a note on Monday that it expects the U.S. economy to reopen gradually as lockdowns are eased and life returns to a semblance of normality for millions of Americans. According to Business Insider, Goldman says the recovery curve is likely to be V-shaped after mid-year and more broadly U-shaped for 2020 as a whole.

Acknowledging that the CCP (Chinese Communist Party) virus crisis has pushed the U.S. and global economies into a deep recession, Goldman outlines how annualized real GDP growth in the second quarter of 2020 is likely to be a massive minus 34 percent compared to the first three months of the year, and that official unemployment figures could still climb as high as 15 percent in the third quarter.

However, Goldman stresses that their predictions depend on how effectively states and the federal government can rejuvenate a stalled economy, and on consumer psychology with respect to spending.

Stimulus Doing Its Job

The banks report also sees encouraging signs that Federal Reserve policies and virus-containment measures taken by states and the Trump Administration will soon bear fruit, with the Fed expected to provide support whenever required. “Weve increased our expectations for U.S. fiscal policy, and see another $550 billion of stimulus this year on top of the already approved $2.5 trillion, and expect a further $1 trillion over 2021-22.”

Goldman analysts believe that the stimulus package will replace much of the income lost through widespread unemployment—and perhaps to such an extent that disposable income may actually grow overall in 2020. Business Insider quotes a Goldman note to the effect that “total disposable personal income will increase by 0.5 percent in 2020 relative to the pre-virus level, or $75 billion.”

Economists at the bank take account of “reasons to be cautious about the pace of US reopening, but also see some encouraging signs, such as the fact that most of the massive U.S, layoffs have so far been temporary.”

According to the report, the same analysts “assume a gradual growth recovery beginning in May that leads to a quarterly annualized increase in GDP of +19 percent in Q3 and +12 percent in Q4, albeit from very low Q2 levels, leaving 2020 growth at -6.0 percent.”

However, the analysis does come with caveats, as Goldman assumes the Fed will step in again to bring its economic life-support to over $3 trillion, or almost 15 percent of GDP.

With the Fed pumping lifeblood into the economy, Goldman analysts expect the recession to be front-loaded, with consumer spending and pent-up demand unleashed, “assuming that the physical constraints on economic activity gradually loosen towards the end of Q2.”

In the report, Goldman Sachs expressed broad support for the Feds approach to date. “In addition to returning rates to zero and announcing uncapped asset purchases, the Fed has employed several crisis-era facilities to provide corporates with funding, relaxed capital buffers, and reserve requirements, and activated FX swap lines with foreign central banks. We see these steps as sufficient for now to support the flow of credit in the economy, and expect the Fed to emphasize that it will intervene further if needed.”

The sentiments were broadly in line with those expressed by competitor Morgan Stanley on April 24.

Consumer Psychology Will Be Key

While Goldman Sachs analysts expect that strong, stimulus-based household disposable income will kick-start the U.S. economy, it remains unclear how consumers and businesses will actually behave until lockdowns have been lifted and Americans return to work.

A Harvard Business Review (HBR) Read More – Source