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United States GDP Q4 2020

United States: GDP growth slows significantly in the fourth quarter

The economy grew moderately in the fourth quarter, albeit at a more modest pace than in the previous quarter. According to a preliminary GDP estimate released by the Bureau of Economic Analysis, the economy expanded 4.0% in Q4 in seasonally-adjusted annualized terms (SAAR), matching analysts’ expectations, after increasing 33.4% in the previous quarter. In annual terms, GDP declined 2.5% in Q4 after dropping 2.8% in Q3. Overall in 2020, the economy contracted 3.5% (2019: +2.2% yoy), marking the worst performance since at least 1946.

The fourth quarter’s slowdown in growth was predominately driven by softer domestic demand growth as a sharp increase in new Covid-19 cases since late October led to the reimposition of some lockdown measures in parts of the country. Private consumption growth eased to 2.5% SAAR (Q3: +41.0% SAAR), while fixed investment growth also softened to 18.4% in Q4 (Q3: +31.3% SAAR). That said, the fall in government consumption moderated to 1.2%, compared to the previous quarter´s 4.8% decline.

Turning to the external sector, growth in exports of goods and services dipped to 22.0% in Q4 from 59.6% in the third quarter, while growth in imports of goods and services eased to 29.5% from 93.1%. The external sector thus subtracted 1.5 percentage points from the headline figure, which was less pronounced than the third quarter’s subtraction of 3.2 percentage points.

The spike in new Covid-19 cases domestically led to stricter lockdown measures in the fourth quarter and weighed heavily on the economic recovery. This headwind will likely carry over into early 2021, but strong fiscal stimulus measures announced in late December and again in January, coupled with the ongoing rollout of an effective vaccine, should bolster economic conditions over the medium term.

Commenting on the outlook, James Knightley, chief economist at ING, noted:

“While we acknowledge there are obvious risks that virus mutations deliver setbacks or problems arise with the vaccination program, we think the positives outweigh the negative risks. Consequently 5% growth looks achievable this year and this is before we consider the potential boost from President Biden’s $3tn+ Build Back Better infrastructure and energy plan.”

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