Fresh economic assessments indicate that the US could be facing slower economic growth this year and next. This forecast came soon after a new , more aggressive tariff strategy was initiated.
Higher Appeal of Recession
A recent Reuters survey of economists also quantified an increase in the probability of a US recession over the next year. The median probability shot up to 45 percent, the highest since December 2023. That’s a pronounced increase from the 25% probability assessed last month.
Downgraded Growth Projections
The poll likewise indicated a substantial shift in the projected growth rate for the U.S. economy by 2025. The median forecast has been reduced to 1.4% from 2.2% in the March poll set. More ominously, economists who join the survey more regularly have slashed their 2025 growth outlook by an average of close to 0.8 percentage points in just the last month. Forecasts for 2026 have similarly been marked down to 1.5% from 2.0% in the March poll.
Impact on Business Sentiment
Economists surveyed unanimously said the previously imposed tariffs sober business sentiment. Importantly — and you might say very negatively from the perspective of half of the respondents — almost one half rated this effect as very negative.
Rising Inflation Expectations
Inflation expectations appear to have steepened (up slightly, across the broader range of measures (consumer prices, core CPI, personal consumption expenditure and core PCE)). Expect those numbers to exceed the Federal Reserve’s goal of 2% and remain above that threshold until 2027. Since the March survey, new contributors have raised their CPI predictions for this year by an average of around 0.6 percentage points — the most significant one-month change in updates since the March 2023 release.
More from Fed Policy Remainders
The hawkish tone for monetary policy comes as inflation expectations are very high, so it is unlikely the Fed will make any significant near-term cuts to interest rates. Over 80% of economists expect the federal funds rate, set by the Federal Reserve, to remain in a band around 4.25%-4.50% at least until July this year. Find yourself not-so-clearly a winner or loser over where the year-end rate will find itself lying; many economists are still looking for it to rise to at least 3.75%-4.00%, even higher.
Unemployment Rate Forecasts
For a comparison/contrast point, shifts in unemployment rate forecasts have been modest compared with the more significant shifts in growth and inflation forecasts. It is anticipated that the unemployment rate, currently 4.2%, will be at 4.4% this year and 4.6% next year.
Global Economic Implications
The IMF said that increasing trade tensions and transforming the world trading system “inevitably lead to downgrades” of its economic forecasts. Still, it’s not forecasting a global recession at the moment. Partly the result of new US tariffs and the responses they have triggered, the international trading system is going through a “reboot,” IMF managing director Christine Lagarde said on Saturday, leaving massive trade policy uncertainty and fanned financial market volatility.
Analyses indicated that the tariffs would, in any event, affect some sectors of the economy more than others. Apparel and other textiles should see the most significant price increases. So, in the automotive space, ” we may end up getting too costlier cars.” However, US tariffs are not really expected to have much direct consequence for the services sector, whilst the rise in uncertainty likely will have some drag on activity.
In response to the US tariffs, not just one but many nations and trading blocks have announced intentions or implemented retaliatory measures. Those moves might also alter the global trajectory of trade and the potential for economic growth.
Other Key Insights
The net view among economists, however, is that the rudimentary tariff system recently enacted by the United States is poised to slow the economy with a significant bang. The combination of increased odds of a recession in the near to medium term, followed by downgrades of growth forecasts at the same time as upticks in inflation expectation, implies one rude economic landscape. Such policies and reactions by other economies will be real variables in global trade and, hence, in the financial path.
