Goldman Sachs said the US economy will shrink far more than first expected as the coronavirus pandemic grinds economic activity to a near standstill, fueling mass joblessness.
The world’s largest economy will shrink by an annualized 34% in the second quarter of the year, compared with an earlier estimate of 24%, wrote economists in a report led by Jan Hatzius (pictured), the investment bank’s chief economist. Unemployment will soar to 15% by mid-year it added, up from a previous forecast of 9%.
These forecasts come only a few days after the US Congress approved a historical $2trn stimulus package to help the economy survive the backlash of the outbreak, that will organise loans to multinational groups as well as small firms.
However, last week a Labor Department report showed a record rise in weekly applications for unemployment benefits, which jumped to nearly 3.3 million from 282,000 in a week. Until now, the record occurred in late 1982, when 695,000 Americans applied for benefits in a single week.
The US economic landscape has changed dramatically in the last few days, as the coronavirus outbreak has gained traction, putting the country at the top of the list in terms of the number of cases that have been diagnosed so far.
More social distancing means less economic activity
As a result, thousands of businesses have already shut down their operations following the recommendations of local governments and health care agencies, even though the federal government is still on the fence about declaring a nationwide lockdown.
The Goldman team said: “As social distancing measures increase in a greater number of areas and as financial conditions tighten further, the negative effects on near-term gross domestic product [GDP] growth become that much greater”.
It added: “This not only means deeper negatives in the very near term but also raises the spectre of more adverse second-round effects on income and spending a bit further down the road.”
In line with these predictions, Morgan Stanley chief US economist Ellen Zentner also forecast in a note that the US will shrink by about 30.1% by the end of June.
But Goldman said a“deeper trough” will give way to “a bigger rebound” as the threat of the virus wanes and economic activity picks up. The bank projected third-quarter GDP is projected to jump by 19%, compared to the firm’s last estimate of a 12% gain. However, the economy will shrink 6.2% through the year as the deeper slump warrants a longer recovery, according to the investment bank.
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