By Joseph Moss, International Banker
Having raised its estimate of the likelihood of a US recession transpiring from 20 percent to 35 percent on March 31, Goldman Sachs updated that forecast just one week later to 45 percent. The US investment bank thus joined a growing chorus of Wall Street analysts that have raised their expectations in recent weeks of US growth falling into negative territory, as the escalating trade war unleashed by the US government continues to roil the global economy, send shockwaves through financial markets and seriously shake the confidence of consumers, businesses and investors in the economy and markets of the United States.
It was on April 2—a date that President Donald Trump dubbed “Liberation Day”—when the US president announced that a universal 10-percent tariff would come into effect on imported goods from almost all countries, alongside a mammoth 145-percent levy on China, the US’ third-largest trading partner, to lift the weighted average US tariff rate to a hefty 30 percent. China swiftly retaliated with tariff hikes of its own on US goods, which thus resulted in the trade war escalating between the two economic heavyweights and severely shaking financial markets and economic projections for the US and global economies.
Goldman Sachs and many other banks have predicted that the ongoing trade hostilities will profoundly drag down the US economy during the current and future quarters. “We revised our US growth and recession forecasts to reflect our expectation that the effective US tariff rate will rise by around 16pp [percentage points] this year, and now forecast 2025 US real GDP growth of 0.5 percent (Q4/Q4) and see a 45 percent probability of a recession over the next 12 months,” the US investment bank confirmed. Goldman’s chief executive, David Solomon, further reinforced this view during an earnings call on April 14. “We are entering the second quarter with a markedly different operating environment than earlier this year,” Solomon told analysts during the call. “The prospect of a recession has increased, with growing indications that economic activity is slowing down around the world.”
According to JPMorgan Chase, the ex-ante (pre-substitution) tariff hike amounts to nearly $1 trillion, or 3 percent of US gross domestic product (GDP), and is thus the largest tax increase on US households and businesses since World War II. While such a levy may not ultimately be paid, given that consumers and businesses can choose not to buy these inflated goods, the impact could nonetheless be magnified by continued retaliations amid the global trade war, a slide in business sentiment and further supply-chain disruptions. “What remains is still enough to push the US and China—and thus likely the global economy—into a recession this year,” Bruce Kasman, J.P. Morgan’s chief global economist, acknowledged in a report published by the US’ biggest bank on April 15.
Indeed, just a few days prior to Goldman’s latest projections, J.P. Morgan had hiked its own forecast of 2025 recessions for the US and global economies to 60 percent, considerably higher than its previous estimate of 40 percent. “Disruptive US policies have been recognised as the biggest risk to the global outlook all year,” the banking giant said in a note, adding that US trade policy was not as business-friendly as was first anticipated. “The effect…is likely to be magnified through (tariff) retaliation, a slide in US business sentiment and supply-chain disruptions.”
While the Trump Administration agreed to a 90-day pause on certain onerous tariffs on April 9, moreover, banks have largely maintained their elevated predictions of a US recession. “The mood music with China has improved, and we expect the US tariff rate on China to drop from around 160 percent to around 60 percent relatively soon. (China is likely to reduce tariffs on the US by a similar amount),” Goldman Sachs’s chief economist, Jan Hatzius, wrote in a note dated May 6. “Our 12-month recession risk estimate remains 45 percent. Beyond US-China, we still expect further tariff increases in other areas—e.g., pharmaceuticals, semiconductors, and potentially movies—and see a meaningful risk that some of the paused ‘reciprocal’ tariffs will take effect after all.”
At 45 percent, therefore, Goldman still marginally expects the US economy to escape recession in the end. In an interview conducted by the bank and published in April, US economist Paul Krugman said that while tariffs reduce efficiency, raise the cost of living and motivate people to buy fewer imported goods, they may nonetheless buy more domestic goods. As such, tariffs may generally have unpleasant effects, but they do not necessarily trigger a collapse in demand that would cause a recession. “Case in point: Britain emerged from WWII with a shortage of dollars and maintained protectionist measures throughout the 1950s, including tariffs of roughly 25 percent,” Krugman added. “These measures undoubtedly left the country less efficient and poorer than it otherwise would have been, but unemployment remained extremely low and growth positive throughout this period.”
What’s more, despite the elevated recession projections emanating widely from Wall Street, analysts still expect the US economy to expand comfortably this year, albeit at a slower pace than they’d previously predicted. According to the latest Bloomberg survey of economists published on April 25, the US economy is set to grow by 1.4 percent in 2025 and 1.5 percent in 2026, compared with 2 percent and 1.9 percent in the previous month’s poll. “Stronger growth outcomes require a quicker resolution of the trade war and a renewal of confidence in US policymaking,” Brett Ryan, senior US economist at Deutsche Bank AG, told Bloomberg.
The International Monetary Fund (IMF), meanwhile, has projected that the US will probably avoid a recession this year, but in late April maintained the likelihood of such a bearish scenario transpiring at 40 percent, much higher than the 27 percent it had previously estimated in October 2024. “We are entering a new era,” the IMF’s chief economist, Pierre-Olivier Gourinchas, told reporters. “The global economic system that has operated for the last 80 years is being reset.” The IMF shared its expectations that the US economy would grow by 1.8 percent this year and 1.7 percent in 2026, which are cuts of 0.9 percent and 0.4 percent, respectively. The Fund also raised its forecast for US inflation in 2025 by roughly one percentage point to 3 percent.
Despite the Trump Administration’s seeming step back from its draconian April 2 measures, the US’ tariff rate still stands at a mammoth 23 percent, which Bloomberg Economics and the IMF have both calculated as the highest in more than a century. As such, consumer and business sentiment have taken a massive hit. “Another important concern is that sustained restrictive trade policies and reduced immigration flow may impose lasting supply costs, which will lower U.S. growth over the long run,” Bruce Kasman also observed.
As far as the global economy is concerned, a majority of economists covering 50 economies who participated in a recent Reuters poll said that there is a high risk of it slipping into recession this year, despite the same group predicting just three months earlier that the global economy would grow at a strong, steady clip. Again, this collectively bearish turn can almost exclusively be attributed to Trump’s tariff war, with Reuters also reporting that none of the more than 300 economists polled from April 1 to 28 said that the tariffs had had a positive impact on business sentiment, and an enormous 92 percent stated that the impact was “negative”. “It’s hard enough for firms to think about July right now, where they don’t know what the reciprocal tariffs are. Try and plan another year down the road. I mean, who knows what it looks like, let alone five years down the road,” said James Rossiter, head of global macro strategy at TD Securities.
The individual economies surveyed by Reuters showed a similar trend, the news outlet also reported, with median forecasts cut for 28 of the 48 economies polled. “Among the others, for 10 economies the consensus view was unchanged, and for 10, including Argentina and Spain, the view was slightly upgraded, based mainly on domestic developments,” Reuters also confirmed. “China and Russia were forecast to grow 4.5 percent and 1.7 percent, respectively, outperforming the US. Those median estimates were unchanged from last quarter’s survey.”
“It’s a very difficult environment to be optimistic about growth,” said Timothy Graf, head of macro strategy for Europe, Middle East and Africa at State Street Global Markets International. “We could get rid of tariffs today, and it will still have done quite a lot of damage, just strictly from the view of the US as a reliable actor in bilateral and multilateral agreements ranging from trade to common defence.”