Trump's tariffs lead to a sharp decline in US GDP

On April 15th, after Trump announced a 90 day suspension of some tariffs, Goldman Sachs withdrew its economic recession forecast that had been released for less than two hours. However, in its latest report, Goldman Sachs stated that this does not mean the outlook is optimistic. According to Goldman Sachs' forecast, even without additional tariffs, the effective tariff rate in the United States will still increase by about 15 percentage points, which will lead to a sharp decline in US GDP growth from 2.5% in 2024 to 0.5% in 2025 (on a quarterly basis).

Goldman Sachs' benchmark scenario predicts that the Federal Reserve will cut interest rates by 25 basis points each in June, July, and September to address the risk of a more severe decline in the labor market. If growth is slightly better than expected and inflation concerns persist, the Federal Reserve may not cut interest rates this year. If the economy falls into recession and the unemployment rate rises significantly, the Federal Reserve may see a rate cut of over 200 basis points, which is typically 400-500 basis points during historical economic downturns. Goldman Sachs believes that from a probability weighted perspective, the market still underestimates the magnitude of interest rate cuts in the coming year.

Goldman Sachs stated that although it will not trigger a complete recession, economic growth will significantly slow down. The probability of the US economy falling into a comprehensive recession within the next 12 months is as high as 45%. According to the March CPI and PPI data, the core PCE price index increased by 2.52% year-on-year, but under the tariff baseline scenario, it is expected to accelerate to around 3.5% in the next six months. In addition, Goldman Sachs' foreign exchange strategists are very pessimistic about the outlook for the US dollar, especially relative to the Japanese yen, euro, and Swiss franc. Even after depreciation in the past two months, the broad trade weighted US dollar index is still 20% higher than its long-term average.