Tariffs to spike inflation, stunt growth and raise recession risks, Goldman says
President Donald Trump’s administration has recently reached a deal with the elite law firm Skadden, Arps, Slate, Meagher & Flom, as announced during a swearing-in ceremony in the Oval Office at the White House. This development comes at a crucial time, with decision day approaching this week for Trump’s latest round of tariffs.
Goldman Sachs, a prominent investment bank, anticipates that the implementation of aggressive duties by the White House will have significant repercussions on the economy. The bank now projects a 15 percentage point increase in tariff rates, a scenario that was previously considered a risk but now appears more likely. However, Goldman notes that eventual product and country exclusions will mitigate this increase to 9 percentage points.
The economic team at Goldman, led by Jan Hatzius, foresees a broad negative impact on the economy once these new trade measures are put into effect. The firm’s latest forecast predicts a rise in inflation, with the preferred core measure expected to reach 3.5% in 2025, surpassing the Federal Reserve’s 2% target. This inflationary pressure is anticipated to coincide with weak economic growth, with projections indicating a mere 0.2% annualized growth rate in the first quarter and 1% for the entire year.
Furthermore, Goldman Sachs expects unemployment to climb to 4.5%, representing a 0.3 percentage point increase from previous estimates. These economic indicators collectively suggest a growing likelihood of recession in the coming months, with a 35% probability compared to the earlier forecast of 20%.
The forecast paints a concerning picture of a potential stagflation economy, characterized by low growth and high inflation. While the U.S. experienced stagflation in the late 1970s and early 1980s, Goldman’s economists do not foresee a repeat of history. Instead, they anticipate that the Federal Reserve will implement three rate cuts this year to counteract the economic challenges posed by the tariffs.
Although the full extent of the tariffs remains unknown, reports suggest that Trump is leaning towards imposing more aggressive levies, potentially impacting U.S. trading partners with a 20% across-the-board tariff. As the situation continues to unfold, it is essential for market participants to stay informed and adapt to the evolving economic landscape.
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