Goldman Sachs slashes Europe GDP forecast as fresh lockdowns point to double-dip recession

  • Goldman Sachs cut Europe’s fourth-quarter growth forecasts after rising coronavirus infections prompted another wave of lockdowns across the region.
  • UK GDP is now expected to shrink 2.4% in the period, a sharp reversal from the bank’s previous estimate of 3.6% growth.
  • The Eurozone could see a 2.3% GDP contraction in the fourth quarter, worse than the previous forecast of 2.2% growth.
  • “We estimate that a longer lockdown would result in negative growth also in Q1, pushing the economy into a double-dip recession,” the bank’s economists wrote in a note.
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Goldman Sachs has sharply cut its forecast for the UK and the eurozone economic growth after new COVID-19 lockdowns were announced across the region over last week.

The bank now expects UK GDP to shrink 2.4% in the fourth quarter of the year, reflecting a sharp reversal of its previous estimate of 3.6% expansion, analysts led by Sven Jari Stehn, chief economist for Europe at Goldman Sachs, said in a November 1 note. 

Prime Minister Boris Johnson ordered a new one-month lockdown for England that begins on Thursday until December 2. But these measures are likely to be extended beyond that point, according to senior government figures. France, Germany, Belgium, and Greece have also announced second lockdowns. Extra measures are being implemented in Spain and Italy as well.

Goldman also slashed estimates for fourth-quarter GDP in the euro area, as economic activity in France, Spain, and Germany has shrunk rapidly. The region can now expect a 2.3% contraction for the final three months of the year, well below its previous forecast for a 2.2% expansion, analysts wrote.

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Goldman Sachs believes that the new lockdowns will lead to sharp contractions, but they would be smaller relative to the downturn earlier this year. “Looking ahead, we assume that the new restrictions will last for three months before they are gradually rolled back starting in February,” the bank’s economists wrote.

“We estimate that a longer lockdown would result in negative growth also in Q1, pushing the economy into a double-dip recession.”

Given that a widely available vaccine is rolled out in the third-quarter next year, recovery would extend to the post-winter period when containment measures are removed. In that scenario, Goldman Sachs expects a 3.2% rebound in the second quarter, followed by strong growth in the second half of next year.

Top Swiss bank UBS has also cut its annualized growth forecast for the Eurozone to a 8% decline, worse than its previous estimate of a 7.7% decline for 2020.

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