Goldman Sachs Boosts Growth Forecasts, Recommends U.S. Banks

Economists at Goldman Sachs Group Inc., the most profitable Wall Street firm, increased their forecasts for U.S. and global growth in 2011, predicted an acceleration in 2012 and recommended investors buy banks.

The U.S. economy will grow at a 2.7 percent rate next year, up from a previous forecast of 2 percent, and 3.6 percent in 2012, economists led by Jan Hatzius in New York said in a report today. The global economy will grow 4.6 percent in 2011 and 4.8 percent in 2012, Dominic Wilson, senior global economist, said in a separate report.

They recommended U.S. bank stocks, junk bonds, commodities, Japanese stocks and China’s currency as the first of the firm’s “top trades” for 2011. The forecasts are a departure from the pessimism that characterized Goldman Sachs’ projections since 2006.

“This outlook represents a fundamental shift in the thinking that has governed our forecast for at least the last five years,” Hatzius said in the report. “The hand-off from policy stimulus to private demand -- which seemed elusive just a couple of months ago -- now appears to be developing.”

U.S. stocks started what is historically their best month with a rally today after ADP Employer Services data showed companies added 93,000 jobs last month, the Federal Reserve said the economy gained strength across most of the nation and manufacturing in China expanded at the fastest pace in seven months. The Standard & Poor’s 500 Index advanced as much as 2.3 percent, the most since Sept. 1.

Underlying Demand

The Goldman Sachs economists said underlying demand, a measure of growth that excludes the effects of fiscal stimulus and inventory restocking, has strengthened and is on track to expand at a 5 percent rate in the fourth quarter.

On average, economists surveyed by Bloomberg expect the U.S. economy to grow 2.5 percent next year and 3.1 percent in 2012. The Organization for Economic Cooperation and Development lowered its forecast for global growth last month to 4.2 percent for 2011 from 4.5 percent, and predicted 4.6 percent for 2012.

Even as growth accelerates, U.S. unemployment will remain elevated by historical standards, declining to 8.5 percent by the end of 2012 from 9.6 percent in October, the economists said. The jobless rate increased to 10.1 percent in October 2009, the highest monthly figure since 1983.

Inflation, Unemployment

Core inflation, which excludes food and energy prices, is likely to be 0.5 percent in each of the next two years, Goldman Sachs said. The combination of high unemployment and low inflation is likely to keep the Federal Reserve from raising interest rates, the economists said.

Conditions will be “positive for risky assets,” they wrote. The S&P 500, the main benchmark for American equities, will likely end next year at 1,450, up 20 percent from 1,206.07 at 4 p.m. in New York.

The S&P 500 has gained 8.2 percent this year and recouped three-fifths of its decline from a record in October 2007. Concerns about the economic fallout from government debt reduction by some European countries caused rallies to stall in April and November and are the principal risk to Goldman’s outlook, the economists said.

Growth in emerging markets may slow next year as acceleration in the U.S. prompts China, other Asian economies and Brazil to tighten monetary policy, the economists said.

For its top trades, Goldman recommended betting on a decline in the value of the U.S. dollar against the Chinese renminbi via two-year non-deliverable forwards for an expected return of 6 percent.

Bets on the KBW Bank Index will return 25 percent, and selling protection on high-yield corporate bonds via credit- default swaps will return 8.7 percent, they predicted.

Japan’s Nikkei 225 Stock Average is likely to return 20 percent next year, while a basket of crude oil, copper, cotton, soybeans and platinum will gain 28 percent, they said.

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net.

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.

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