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4 factors that'll drive economic acceleration in 2020: Goldman Sachs

four open wheel cars racing around a turn at the Indianapolis Motor Speedway in Speedway, Indiana
four open wheel cars racing around a turn at the Indianapolis Motor Speedway in Speedway, Indiana

Goldman Sachs analysts are expecting a pickup in economic growth in 2020.

The economists see real GDP growing at a 2.3% clip in early 2020 with an average full-year growth rate of 2.1% for 2020.

Here are the four reasons they cite for the economic optimism:

Lower interest rates

The Federal Reserve has cut interest rates three times so far in 2019, after raising them four times in 2018. Lower interest rates eventually lead to a loosening of financial conditions, the analysts say.

“Our economists estimate that the peak GDP tailwind attributable to easing financial conditions occurs with a lag of roughly three quarters,” the analysts, led by chief U.S. equity strategist David Kostin, wrote in a note to clients.

Financial conditions have arguably already started to loosen, with the average rate on a 30-year fixed mortgage now at 3.75%, compared to 4.94% one year ago, according to data from Freddie Mac.

Peak tariffs

While the U.S. has placed tariffs on a variety of imports from China amid the ongoing trade war between the world’s two largest economies, Goldman Sachs doesn’t expect an escalation of the tariffs.

“Our economists believe that tariffs have peaked and that the drag on U.S. GDP attributable to the U.S.-China trade war is now abating,” the analysts wrote. “Their base case is that tariff levels on imports from China remain flat in 2020.”

In October, the U.S. and China reached a Phase 1 trade deal, which sparked a wave of optimism about the negotiations. The Phase 1 deal has yet to be signed.

Inventory cycle recovery

Goldman Sachs says inventory-to-sales ratio, a key metric for measuring a company’s inventory levels, for the aggregate S&P 500 have moved lower this year.

But that isn’t expected to persist.

“Our colleagues believe the manufacturing rebound, strong credit conditions, and continued consumer demand create favorable conditions for a rebound in the inventory cycle,” Goldman Sachs analysts wrote. “In the October [National Federation of Independent Business] survey, the net share of small businesses planning to add to inventories recorded its highest reading since last year.”

Fading of one-off events

In 2019, the economy was affected by a few one-off events, including the General Motors (GM) strike and a decline in structures investment from the fall in oil prices, according to Goldman Sachs.

But these drags are set to fade amid a stabilization in oil prices and the end of the GM strike, they said.

“The resolution of several idiosyncratic events that have weighed on U.S. economic growth in 2019 should provide an additional economic boost,” they wrote.

Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.

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