In a note to clients, the investment bank stopped short of predicting a recession but forecast growth would slow to 2.5% and 2.2% in the first two quarters of 2019 and then just 1.8% and 1.6% of real GDP for Q3 and Q4.

By Daniel Herborn

Posted on November 20, 2018

“We expect tighter financial conditions and a fading fiscal stimulus to be the key drivers of the deceleration,” wrote Jan Hatzius, Goldman Sachs’ Chief Economist.

The investment bank believes the twin effects of the impact of the tax cut receding and the Reserve continuing to raise interest rates will lead to the slowing growth.

A number of factors suggest US growth will slow next year

Goldman Sach is forecasting a further interest rate rise in December and four more in 2019.

It anticipates the Reserve will take this action in response to inflation hitting 2.2% by the end of 2019 on the back of escalating tariffs and increasing wages.

“Our central expectation is that financial conditions will shave about 3/4pp from US real GDP growth over the next year; this is implied both by the simple assumption that financial conditions stay at the current level and by a (Financial Conditions Index) projection that uses Goldman Sachs forecasts for the funds rate, US Treasury yields, equity prices, credit spreads, and the dollar,” the note continued.

“In addition, the impulse from fiscal policy will likely diminish significantly, regardless of the midterm election outcome. All told, we expect US growth to slow from 3.5% now to a trend-like 1.75% in late 2019.”

Goldman Sachs expecting US growth to slow but does not see a recession on the horizon

Hatzius was careful to note, however, that the bank’s analytics did not foresee either an overheating market nor the financial imbalances which are the root causes of most US recessions.

In light of this, it anticipates the current expansion (which dates back to June 2009) will continue next year and become the longest run of growth in US history.

The investment bank has also predicted the Australian, New Zealand and Canadian dollars will rise, along with the Swedish krona and Latin American currencies generally.

It also revised its previously bearish predictions on the Japanese yen downwards.

Header image credit: Markus Spiske