Coronavirus outbreak to cause sharp contraction in US economy: Goldman Sachs

Firm says economy will shrink by 5% in Q2

The U.S. economy will see a far steeper contraction as a result of the new coronavirus outbreak than initially thought, according to Goldman Sachs.

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The firm sees zero growth in the first quarter followed by a steep 5 percent contraction in the second quarter. Economists at the bank say growth will rebound to 3 percent and 4 percent in the third and fourth quarters, respectively, but warn uncertainty around their forecast is far greater than usual.

The National Bureau of Economic Research would likely classify such a downturn as a recession even though the technical definition is at least two consecutive quarters of economic contraction, the economists say.

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“We expect US economic activity to contract sharply in the remainder of March and throughout April as virus fears lead consumers and businesses to continue to cut back on spending such as travel, entertainment and restaurant meals,” wrote Jan Hatzius, chief economist at Goldman Sachs. “Emerging supply chain disruptions and the recent tightening in financial conditions will likely add to the growth hit.”

The bank’s updated forecast was released shortly before the Federal Reserve on Sunday evening cut its benchmark interest rate by 100 basis points to near zero and launched a $700 billion asset-purchase program to support the U.S. economy.

The COVID-19 outbreak has infected 3,774 people in the U.S. and killed 69, according to the latest figures provided by Johns Hopkins University & Medicine. Globally, there have been 153,517 confirmed cases resulting in 5,735 deaths, according to the World Healh Organization, causing some countries to lock down their populations.

“While we are not assuming an Italy-style national shutdown in the US, the experience of countries like Italy, Spain and France offers some indications of the impact that extreme local quarantines could have,” Hatzius wrote. “In Italy, for example, all retail stores except drug stores and grocery stores are closed, hotel occupancy is at a small fraction of occupancy and some factories have closed temporarily while many others are operating below normal levels because workers are resisting going to work out of fear of getting sick.”

Goldman believes consumer cutbacks in the most heavily impacted areas could provide a 6 percent to 7 percent hit to gross domestic product. The firm also sees larger supply chain disruptions than originally expected and a 1 percent to 2 percent boost to GDP from fiscal policy.

Meanwhile, economists at Bank of America said on Friday they believe the U.S. economy “flirts with recession” by contracting 0.5 percent in the second quarter before returning to 0.3 percent growth in the third quarter.

The Fed's emergency action over the weekend “should help to stem some of the panic in markets,” wrote Michelle Meyer, chief U.S. economist at Bank of America, on Monday. She added the U.S. government will need to take fiscal action and the Treasury will have to provide a financial backstop, but that won’t stop the economy from weakening.

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“We are already forecasting negative GDP growth in 2Q but the risk is that it proves to be a much deeper and more prolonged contraction in economic activity,” Meyer wrote.