Client Call: Macro Outlook 2021

Episode Summary

Executive Summary: Goldman Sachs’ 2021 macro outlook centered on a vaccine-shaped recovery, tempered by a likely divided U.S. government after the election. Alec Phillips said a Republican Senate was most likely, limiting tax hikes and large structural fiscal changes but still allowing a meaningful stimulus package, likely around $1 trillion. Jan Hatzius argued that COVID resurgence in Europe and the U.S. has weakened near-term growth, but vaccine progress, supportive policy, and limited scarring could drive a strong rebound in 2021-22.

Main Topics: U.S. election and Senate control (Priority: 5/5): Phillips walked through the Georgia runoff scenario, concluding that a narrow Republican Senate majority was the most likely outcome, though a 50-50 split with a Democratic tie-break remained possible. Fiscal policy outlook after the election (Priority: 5/5): A divided Congress reduces the odds of large-scale structural fiscal changes and tax increases, but still leaves room for a sizable stimulus package, potentially sooner than previously expected. Global growth forecast and COVID resurgence (Priority: 5/5): Hatzius described Goldman’s above-consensus growth outlook for 2021-22, while noting that virus-driven restrictions in Europe and a renewed U.S. outbreak forced near-term downgrades, especially in the euro area. Vaccine-driven recovery (Priority: 5/5): The firm’s outlook hinges on effective vaccine rollout leading to herd immunity by mid-2021 in advanced economies, with a sizable GDP boost from reduced health restrictions and improved confidence. Scarring risk in labor markets and business failures (Priority: 4/5): Despite concerns about permanent damage from unemployment and bankruptcies, Hatzius argued that government support and the temporary nature of the shock should limit long-term scarring. Inflation and central bank policy (Priority: 4/5): Inflation is expected to rise from depressed levels due to base effects and normalization, but slack should keep it contained; major central banks are expected to stay accommodative, with no hikes until 2025. China and U.S.-China relations (Priority: 4/5): China is expected to grow below consensus because it has already recovered strongly, while U.S.-China trade policy may gradually ease under Biden, though broader tensions such as technology restrictions may persist.

Key Arguments: A slim Republican Senate majority is the base case, but Georgia runoffs leave a realistic path to a 50-50 split and Democratic tie-break control. Even a narrow Democratic majority would matter materially for fiscal policy because Senate procedure, not just ideology, determines whether legislation can reach a vote. The election reduces the odds of a large Democratic-policy shift: fewer chances of major infrastructure spending or tax increases, but not of additional fiscal stimulus. Stimulus is still likely, but smaller than under a blue wave: roughly $1 trillion rather than about $2.5 trillion, with timing possibly pulled forward into December or early 2021. COVID resurgence, especially in Europe, is the main reason for recent forecast cuts; lockdown tightening is materially weighing on near-term GDP. A vaccine is the key upside catalyst: Goldman assumes mass vaccination can materially raise GDP in the U.S. and Europe by mid-2021 and reduce the risk of renewed outbreaks. Labor-market and bankruptcy damage has been less severe than feared because policy support and temporary layoffs have preserved firm-worker links and kept insolvencies subdued. Inflation should rise from very low levels but remain contained because the economy will still have slack for years, limiting pressure on central banks. China’s room for recovery is smaller because output is already near trend, and policymakers may deliberately slow credit/fiscal stimulus to avoid future imbalances. Under a Biden administration, tariffs on China could eventually fall, but any rollback is likely gradual and may require negotiation; broader tech/export restrictions may not ease as much.

Data Points: Republican Senate seats: at least 50 seats - Phillips said Republicans had likely secured 50 Senate seats, leaving two Georgia races to decide control. Georgia runoff date: January 5, 2021 - The two unresolved Senate seats were headed to runoff elections in Georgia. Democratic Senate odds in prediction markets: 20% to 25% - Phillips cited market-implied odds for a Democratic Senate majority. Fiscal stimulus under blue-wave scenario: about $2.5 trillion - Goldman’s pre-election assumption for early-2021 fiscal support under a Democratic sweep. Likely fiscal stimulus size: about $1 trillion - Goldman’s revised estimate under a divided government scenario. Stimulus as share of GDP: almost 5% of GDP - Hatzius characterized a roughly $1 trillion package as still very large relative to the economy. Global GDP growth forecast 2021: 6.0% - Goldman’s global growth forecast for 2021, above Bloomberg consensus of 5.2%. Global GDP growth forecast 2022: 4.6% - Goldman’s global growth forecast for 2022, above Bloomberg consensus of 3.7%. Euro area quarterly GDP decline: a little over 2% q/q not annualized - Goldman’s near-term euro area forecast amid renewed lockdowns. Euro area annualized decline equivalent: 8% to 9% annualized - Hatzius translated the quarterly drop into annualized terms. U.S. unemployment rate peak: around 15% to 20% - Hatzius referenced the early-pandemic spike in U.S. unemployment, noting statistical issues. U.S. unemployment rate October reading: about 7% - He cited the improvement from the spring peak to the October labor report. Vaccine boost to GDP: about 2% - Estimated lift to the level of real GDP in the U.S. and euro area in the second half of 2021. Fed asset purchases: $120 billion per month - Goldman expected ongoing Fed QE, split into $80 billion Treasuries and $40 billion MBS. ECB additional QE: 400 billion euros plus - Expected December expansion of the ECB’s pandemic emergency purchase program. First policy rate hike: no hikes until 2025 - Goldman’s forecast for major advanced-economy central banks. China 2021 GDP forecast: 7.5% - Goldman’s China forecast versus 8.0% consensus, reflecting already-strong recovery and reduced stimulus.

Pivotal Quotes: "What probably happens now is you have a much smaller package, call it something like a trillion dollars." — Alec Phillips: On likely fiscal stimulus size under a divided Congress. "What’s really happened is the COVID resurgence." — Jan Hatzius: Explaining why Goldman cut parts of its near-term growth outlook. "You boost the level of GDP in, say, the second half of 2021 by 2% relative to what it otherwise would be because of the availability of a vaccine." — Jan Hatzius: Describing the modeled economic impact of vaccine rollout in the U.S. and Europe.

Implications: Markets should expect less fiscal and regulatory disruption than under a blue wave, but still substantial stimulus and very easy monetary policy. The big swing factor is vaccine rollout: faster, effective deployment supports a strong 2021-22 rebound; delays would materially weaken the outlook.