Goldman sees strong economy in 2021, but it’s going ‘to get worse before it gets better’

Goldman Sachs projects GDP will grow at a 5.3% pace in 2021, ahead of the consensus around 4%.
The firm cautions that the economy will “get worse before it gets better” due to coronavirus spread.
In addition to the big GDP jump, Goldman sees the unemployment rate falling to 5.3%.

Goldman Sachs sees a prosperous 2021 but is cautious about the bumpy road the U.S. economy will ride before it gets there. In a forecast that is well above Wall Street consensus, the bank’s economists see gross domestic product accelerating at a 5.3% pace next year, considerably stronger than the 4% median forecast from the Federal Reserve.

However, the firm sees several obstacles along the way, particularly the damage that quickly accelerating coronavirus cases will have on the recovery.

“The pace of recovery is likely to get worse before it gets better,” Goldman economist David Mericle wrote in a report. “Fiscal support has largely dried up for now, leaving disposable income lower in the final months of the year. But the largest risk is that the third wave of the coronavirus is likely to worsen with colder temperatures.”

Indeed, the pandemic’s toll has swelled in recent weeks, with new daily cases eclipsing the 150,000 mark on Thursday and poised to continue rising as winter weather sets in. Few states have reimposed major restrictions yet, but are more likely to do so as the virus spreads. On the upside, hopes for treatment received a major boost this week when Pfizer reported that its Covid-19 vaccine showed a better than 90% success rate.

Should the Pfiizer-BioNTech vaccine be approved early in 2021, the most at-risk parts of the population would get inoculations first. Once that process begins, the economic healing can accelerate, Mericle wrote.

“But the path is likely to be bumpy as virus resurgence puts the brakes on the recovery this winter before the vaccine effect triggers reacceleration next spring,” he said.

Unemployment to plunge

As the year progresses, Goldman forecasts hiring to accelerate, with the current 6.9% unemployment rate to fall to 5.3% by the end of the year.

That’s contingent on the likelihood of some type of additional fiscal stimulus from Congress — likely around $1 trillion under a divided government scenario and $2.5 trillion should the Democrats unexpectedly win contested Georgia elections and take over the Senate.

“The economy is likely to reaccelerate next spring as mass immunization fully reopens the high-contact consumer services that account for most of the remaining output gap,” Mericle said. “This should fuel a mid-year consumption boom as restored opportunities to spend allow households to substantially lower their saving rates and spend accumulated excess savings.”

The Goldman analysis notes that consumer spending already has recovered to 98% of its pre-pandemic level, while business bankruptcies have been less thanks to government support programs. Housing also is expected to continue its recovery though durable goods consumption could slow.

However, the firm said implementation of the vaccine — others are in late-stage trials as well — should get consumers back to engaging in activities like going to restaurants and other high-contact activities.

“While the path ahead is likely to be bumpy, we expect mass immunization to largely complete the reopening process and trigger a reacceleration next spring that will leave full-year growth well above expectations,” Mericle wrote. “Once virus fears are largely out of the way, demand for most high-contact consumer services should quickly rebound to pre-pandemic levels.” Goldman does not expect the rebound in activity to trigger Federal Reserve action.

With the central bank’s commitment not to raise rates until inflation is consistently above 2%, Goldman sees no increases until early 2025. From there, it expects raises of 50 basis points per year until the benchmark short-term borrowing rate hits around 2%-2.5% from its current anchor near zero.