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  • Goldman Sachs on Friday dramatically cut its US economic forecast and is now expecting GDP will decline by 24% in the second quarter of 2020 due to the coronavirus pandemic.
  • A drop of that size would set a new record - it would be nearly two-and-a-half times the largest drop of 10% seen in 1958.
  • "Early data points over the last week strengthen our confidence that a dramatic slowdown is indeed already underway," Goldman Sachs economist Jan Hatzius wrote in a Friday note.
  • Read more on Business Insider SA.

After already saying that the coronavirus outbreak will push the US into a recession, Goldman Sachs has again updated its estimates and now thinks the fallout could be even worse than it previously expected.

Goldman Sachs on Friday dramatically cut its US economic forecast and is now expecting gross domestic product will decline by 24% in the second quarter of 2020 due to the coronavirus pandemic. A drop of that size would be a record, nearly two-and-a-half times the largest drop of 10% seen in 1958.

"The sudden stop in US economic activity in response to the virus is unprecedented, and the early data points over the last week strengthen our confidence that a dramatic slowdown is indeed already underway," Goldman Sachs economist Jan Hatzius wrote in a Friday note.

There are three main reasons why Goldman slashed its GDP forecast. The first is that the firm expects spending in face-to-face service industries to take a more severe hit as consumers are increasingly encouraged to practice social distancing and stay at home.

Second, Goldman now forecasts a major contraction in manufacturing, with reduced domestic demand for non-food goods, reduced foreign demand for US goods exports, supply chain disruptions, and plant closures, according to the note. The firm also foresees a slowdown in the US housing sector, from construction through real estate, similar to data in Asia.

The hits will lower US GDP by as much as 10% in April, the report said. Goldman Sachs now expects full-year growth in the US to be -3.8% on an annual average basis.

Goldman Sachs

After April, the firm expects that drag on the economy will gradually fade by about 10% per month.

"While the exact timing is highly uncertain and relapses are plausible, the assumption of a gradual recovery reflects the potential contributions from factors such as effective mitigation and testing actions, weather effects, medical breakthroughs or adaptation by firms and consumers," Hatzius said, adding that the slow pace of recovery even in 2021 allows for longer-lasting scarring effects on businesses and workers.

The downward revision in growth also sharply increases Goldman's unemployment rate forecasts. The firm expects the unemployment rate to increase to 9% from 3.5% over the next couple of quarters, according to the report.

Details of the White House's forthcoming fiscal stimulus package could push the unemployment rate up or down, Goldman said.

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