VIEW: Goldman Sachs Mark Down ’22 U.S. GDP View On Omicron

Goldman Sachs note that “the emergence of the Omicron variant increases the risks and uncertainty around the U.S. economic outlook.” While many questions remain unanswered, they now think “a moderate downside scenario where the virus spreads more quickly but immunity against severe disease is only slightly weakened is most likely.”

• “Omicron could slow economic reopening,” but they expect “only a modest drag on service spending because domestic virus-control policy and economic activity have become significantly less sensitive to virus spread.”
• Omicron could “exacerbate goods supply shortages if virus spread in other countries necessitates tight restrictions. This was a major problem during the Delta wave, but increases in vaccination rates in foreign trade partners since then should limit the scope for severe supply disruptions.”
• Omicron could “delay the timeline for some people feeling comfortable returning to work and cause worker shortages to linger somewhat longer.”
• As a result, they have updated their GDP expectations to incorporate the updated virus outlook as well as the latest GDP tracking data. These changes result in a +0.5ppt (Q/Q ar) boost to their Q4 growth forecast “based mostly on stronger inventory data,” and a 1.5ppt cut to growth in Q1 and 0.5ppt cut in Q2 due to “virus-related drags on reopening and goods supply.” They now expect GDP growth of +6.5%/+3.0%/+3.5%/+3.0%/+2.0% in Q421-Q422. This implies '22 GDP growth of +3.8% (vs. 4.2% previously) on a full-year basis and +2.9% (vs. +3.3% previously) on a Q4/Q4 basis.
• They see “mixed implications for inflation. Reduced demand for virus-sensitive services such as travel could have a disinflationary impact in the near term, but prior virus waves suggest that such pressures would be temporary and reverse as demand recovers. In contrast, further supply chain disruptions due to Omicron or further delays in the recovery of labor supply could have a somewhat more lasting inflationary impact.”