Goldman Sachs slashes forecasts for next quarter, now sees 34% GDP contraction and 15% unemployment

MANDEL NGAN/AFP/Getty Images

The Reflecting Pool which has been drained for maintenance is seen in front of the Washington Monument in Washington, DC on March 26, 2020.

• US gross domestic product will shrink by 34% in the second quarter as the coronavirus fuels a worse-than-expected hit to the labor market, Goldman Sachs said Tuesday.
• The bank initially called for a 24% hit to GDP in the period but lowered its estimate on "sky-high jobless claims numbers" released Thursday.
• Unemployment will quadruple to 15% by the second half of the year as layoffs continue, the team led by Jan Hatzius wrote.
• Goldman sees GDP surging 19% in the third quarter as the government's fiscal and monetary easing drives a "bigger rebound" than previously forecast.
• Visit Business Insider's homepage for more stories.

The US economy will shrink far more than first expected as the coronavirus outbreak halts economic activity and fuels an unprecedented spike in joblessness, Goldman Sachs analysts said.

The bank now expects second-quarter gross domestic product to contract by 34% compared to its previous expectation of a 24% slide. Unemployment will quadruple from February lows to hit 15% by the second half of 2020, the team led by Jan Hatzius wrote Tuesday.

Goldman's downward revisions reflect the "sky-high jobless claims numbers" and Congress's bigger-than-expected stimulus measure. Unemployment insurance claims skyrocketed by a record 3.28 million in the week ended March 21, giving economists a first look at how quickly virus containment measures pummeled the economy. The data "show an even bigger output and (especially) labor market collapse than we had anticipated," Goldman said.

"This not only means deeper negatives in the very near term but also raises the specter of more adverse second-round effects on income and spending a bit further down the road," the team added.

Read more: UBS outlines 3 major investing themes the coronavirus crisis is shaping today - and breaks down how they'll play out in the years to come

Yet such a chain reaction could be quelled by the government and Federal Reserve's massive relief policy actions. The $2 trillion stimulus bill will bolster unemployment benefits, issue direct payments to millions of Americans, and provide hundreds of billions of dollars in emergency loans to ailing businesses. A future package will likely focus on state aid, Goldman said.

The Fed has backed up the fiscal policy moves with monetary easing, and will likely use the $454 billion added to the Treasury Department's Exchange Stabilization Fund to further lift credit stresses, the team added.

A "deeper trough" will give way to "a bigger rebound" as the virus threat subsides and economic activity resumes, Goldman said. Third-quarter GDP is projected to jump by 19%, compared to the firm's last estimate of a 12% gain. Still, the economy will shrink 6.2% through the year as the deeper slump warrants a longer recovery, according to the investment bank.

NOW WATCH: 3.3 million Americans filed for unemployment - and an economist predicts it could be far worse than the Great Recession