Goldman Sachs says the economy has 'probably bottomed now' ahead of a second-half surge

Published Mon, May 4 202011:34 AM EDTUpdated Mon, May 4 20201:12 PM EDT

After weeks of seeing some of the deepest shocks since the Great Depression, the worst of the economic news looks like it's in the past, according to Goldman Sachs. Just in the U.S. alone, more than 30 million people have filed for unemployment benefits and most of the economy remains on lockdown due to measures taken to halt the coronavirus spread. Infection rates continue to rise around the U.S. and in other parts of the world, showing that the disease remains remapnt. However, Goldman pointed to several reasons for optimism, including multiple regions that have reopened, aggressive fiscal and monetary stimulus, and heightened awareness that has resulted in cautionary measures taken by the public. "Economic activity has probably bottomed now. For one thing, lockdowns and social distancing are starting to diminish as many countries are cautiously reopening their economies," Jan Hatzius, the firm's chief economist, said in a note. Hatzius added he expects "GDP to grow more quickly" than implied by the "economic lockdown index," which combines official restrictions and social distancing data to indicate growth prospects. That will come "as firms and households learn to combine higher economic activity with continued virus control via a range of adjustment mechanisms including mask and glove wearing, frequent cleanings of workplaces, lower office and retail occupancy, and improved testing and contact tracing," he wrote. Big bounce in the second half In real terms, he projects GDP in advanced economies to fall 32% in the second quarter, but for that to be followed by a 16% gain in Q3 and 13% increase in the final three months of the year. "With physical constraints on activity easing, the debate is moving on to economic second-round effects via a) financial conditions and b) business and household income" Hatzius wrote. "We agree there are some significant risks, but on the whole they look smaller than one would expect given the magnitude of the shock and a simple extrapolation from past cyclical experience." The outlook comes at a critical time. States and local communities around the U.S. are beginning to relax stringent social distancing rules implemented as the coronavirus morphed into a pandemic. Should the spread be held at bay, that will encourage more of the economy to come back online. A failure, though, would represent a major setback to the world's biggest economy and possibly drive another leg lower. Goldman is taking the more optimistic outlook, noting that financial conditions actually are easier now than they were even a year ago, thanks to the Federal Reserve's moves to slash interest rates and institute a number of liquidity and lending measures aimed at keeping the economy afloat. "In most US recessions, the key dynamic to watch is the 'multiplier' — the interplay between output declines, job losses, household income, and demand weakness. However, this cycle looks very different because of the massive fiscal response, including sharply expanded unemployment benefits and the $1,200 tax rebates for low- and middle-income households," Hatzius wrote. He also cites three positives ahead: Evidence that warmer temperatures and "low-cost hygiene" can help contain the virus, the increased availability of treatment options, and the ability to learn from areas that are reopening on what works and what doesn't.

Customers are seen at Puckett's Grocery & Restaurant on April 27, 2020 in Franklin, Tennessee. Tennessee is one of the first states to reopen restaurants after the onset of the coronavirus (COVID-19).

Jason Kempin | Getty Images

After weeks of seeing some of the deepest shocks since the Great Depression, the worst of the economic news looks like it's in the past, according to Goldman Sachs.

NEXT PRO TALK

3 Days Remaining

Wed, July 6 2022 - 12:00pm

CNBC PRO Talks: Top tech investor and analyst Gene Munster provides stock picks and strategy for the beaten-up sector

More In Pro News and Analysis

Investors are counting on the 3rd quarter — typically a 'no man's land' — to set up a year-end rally

Patti Domm

Best trades on CNBC Friday: Pros lay out entry points in these tech and energy stocks

Joshua Natoli

Investment banks trumpet fresh ideas in new second-half stock trades

Samantha Subin