High Bond Yields Could Double Drag on US Growth by 2027: Goldman Sachs
Goldman Sachs warns that persistently high bond yields could more than double the drag on US economic growth by 2027, threatening business investment.
The US economy may be facing a steeper climb than previously anticipated. According to a recent report by Goldman Sachs, persistently high bond yields could more than double their negative impact on US economic growth 2027, potentially stifling business investment and testing the limits of financial market resilience.
The Baseline vs. The Risk
In its baseline scenario, Goldman Sachs economists estimated that higher interest rates would shave approximately 0.2 percentage points off the US economic growth rate in 2027. However, the report warns of a more concerning alternative: if borrowing costs remain near their current elevated levels, the drag on the economy could surge to over 0.5 percentage points—more than twice the initial baseline impact.
While the firm expects the US economy to grow close to its potential rate of 2.3 per cent in 2027, this outlook remains fragile. The report emphasizes that sustained high financing costs would create significant pressure across three critical pillars of the economy: housing, general consumption, and business investment.
Business Investment and the AI Exception
The ripple effects of high interest rates are expected to hit corporate spending hard. Goldman Sachs estimates that increased refinancing costs could reduce business investment growth by about 0.3 percentage points in 2027 and the years following. Similar to the overall growth forecast, this negative impact could more than double if borrowing rates do not decline from current levels.
Interestingly, there is one bright spot: Artificial Intelligence (AI). Investment in AI infrastructure has shown remarkable resilience despite the climb in input costs and interest rates. Strategists expect AI-related capital expenditure to maintain a healthy pace through 2027. However, the report does flag emerging risks, specifically rising leverage and the tightening links between financing and investment within the AI sector.
A Warning of 'Darker Tail Scenarios'
The Goldman Sachs report also brings into focus the sobering views of Mark Zandi, Chief Economist at Moody’s Analytics. Contrary to the narrative of a "resilient" economy, Zandi describes the US economic landscape as vulnerable.
Zandi suggests that the distribution of possible outcomes is heavily skewed toward "darker tail scenarios," estimating a one-in-three chance that existing vulnerabilities could push the economy "completely off the rails." He points toward a tenuous growth foundation, citing:
- Weak hiring trends in the labor market.
- Stagnant or declining real wage growth.
- A subsequent decline in household purchasing power.
The Global Context
Global bond yields have already reached multi-decade highs. While financial markets have remained broadly stable thus far, the report warns that this resilience has a breaking point. If inflation pressures prevent borrowing costs from easing, or if volatility increases, the stability of the markets could be severely tested.
Ultimately, the economic trajectory for 2027 hinges on a single critical factor: whether bond yields moderate or remain high enough to deepen the pressure on corporate investment and overall economic activity.