Economists Slash US Growth, Boost Inflation Forecasts on Tariffs

Wall Street economists said the US risks a recession this year and inflation could return to pandemic levels following the Trump administration’s announcement of major tariffs on global trading partners.

Author of the article:

Bloomberg News

Matthew Boesler

Published Apr 03, 2025  •  3 minute read

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(Bloomberg) — Wall Street economists said the US risks a recession this year and inflation could return to pandemic levels following the Trump administration’s announcement of major tariffs on global trading partners.

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Nomura Securities International Inc. said it expects gross domestic product to expand 0.6% in 2025 after accounting for the new levies on imports, and a key measure of underlying inflation to rise to 4.7%. 

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Barclays Plc economists took a more pessimistic view toward GDP — projecting a 0.1% contraction — and a slightly more optimistic view of inflation, penciling in a 3.7% increase. They also look for the unemployment rate to climb by year-end.

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President Donald Trump’s tariff announcement on Wednesday sent global financial markets into a tailspin, upending forecasts for ongoing expansion in the world’s largest economy. Several major banks offered provisional estimates of the impact which indicated a big hit to growth and boost to inflation, though they declined to make formal revisions, citing the possibility that the measures could be tempered in coming days.

“Clearly such a large adjustment poses material downside risk to the expansion. Our assessment would lift not only inflation into 2026, but also sees GDP fall and the unemployment rate rise,” UBS Chief US Economist Jonathan Pingle said Wednesday in a note. “We would expect two quarters of negative GDP growth.”

Trump says he wants to rebalance the global trading system in favor of American workers, who he argues have suffered for decades from unfair deals negotiated by his predecessors. In a statement following the announcement, the US Trade Representative Office said tariffs for each country were calculated based on the size of their trade surplus with and the values of their exports to the US.

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The levies, if they remain in place, threaten to erase most of the progress made in reducing inflation over the last three years. The Federal Reserve’s preferred measure — based on the personal consumption expenditures price index excluding food and energy — stood at 2.8% in February, down from the pandemic high of 5.6% reached in February 2022.

“If one takes a now current policy baseline forward, core PCE forecasts for 2025 should be revised into the 4-5% range,” Peter Williams, an economist at 22V Research, said in a note late Wednesday. “The low-to-mid 3s seemed appropriate based off policy this morning. Excess precision feels unnecessary and impractical. There is now going to be the feared second wave higher of core PCE inflation.”

Amid the rout in markets, investors rushed into bets on several Fed interest-rate cuts over the remainder of the year despite the expected rise in inflation. They now see a roughly 30% chance of a quarter-point reduction at the conclusion of the US central bank’s next two-day policy meeting on May 7, and better-than-even odds of cuts at each of the final five meetings of the year, according to futures.

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What Bloomberg Economics Says…

“We’re raising our baseline core PCE inflation forecast for the fourth quarter of 2025 to 3.0% (vs. a previous forecast of 2.8%), and our unemployment-rate forecast to 4.8% (vs. 4.5% previously). We pencil in a more modest inflation impact from the tariffs than the 2018 Fed model provides, as we think most of the burden will fall on the labor market and on firms’ profit margins.”

— Anna Wong, chief US economist

To read the full note, click here

Economists were generally more cautious on the outlook for rates. Fed officials “would likely react, but slowly at first, and really only respond forcefully after seeing the economic damage because of the inflation risks, in our view,” Pingle said in the UBS report.

“The price level increase is large enough that monetary policy could risk getting caught offside, not unlike in 2022” when the central bank was slow to raise rates, he said.

Fed Chair Jerome Powell will give a speech on the economic outlook Friday morning after the Bureau of Labor Statistics publishes its March employment report.

—With assistance from Jarrell Dillard and Alex Tanzi.

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