U.S. Economic Outlook Deteriorates Due to Tariffs

By Indradip Ghosh
BENGALURU (Reuters) – An aggressive U.S. tariff policy will trigger a significant slowdown in the U.S. economy this year and next. Economists polled by Reuters indicate the median probability of recession in the next 12 months is approaching 50%.

Trade War Effects

A recent 90-day pause in reciprocal tariffs by President Donald Trump has not improved the U.S. economic outlook, as tensions with China escalate. Increased inflation expectations have caused forecasters to lower growth predictions.

Inflation and Growth Forecasts

Median inflation forecasts have surged, limiting the Federal Reserve’s ability to implement more than two interest rate cuts by year-end. The probability of a U.S. recession has increased to 45%, the highest level since December 2023.

James Knightley, chief international economist at ING, notes that weakened sentiment coupled with rising prices, job concerns, and declining wealth contributes to a toxic mix for consumer spending.

Economic Growth Expectations

The economy began the year strongly but is now forecast to grow only 1.4% in 2025, downgraded from 2.2%. Most economists have adjusted their growth outlook by approximately 80 basis points in the last month, marking a notable change since July 2022.

Tariffs and Business Sentiment

All economists surveyed believe tariffs have negatively affected business sentiment, with many describing the impact as very negative. Continued uncertainty surrounding tariffs is expected to stifle growth, increase inflation, and elevate tail risks.

Overview of Inflation Expectations

Economists project inflation measures to remain above the Federal Reserve’s 2% target until at least 2027. Forecasts for consumer price index (CPI) have been revised upward significantly, posing challenges for monetary policy.

Federal Reserve Responses

Federal Reserve Chair Jerome Powell has cautioned that tariff policies could distance inflation and employment from the Fed’s goals, indicating the institution may wait for greater clarity before acting further.

Future Predictions

A majority of economists expect the federal funds rate to remain at 4.25%-4.50% until at least July, with a more than 60% consensus on potential rate cuts. The unemployment rate is expected to rise slightly from its current figure of 4.2%.

(Other stories from the Reuters global economic poll)