US growth forecast revised down to 0.8% this year

An aggressive Trump tariff announcement reshapes our view for the US economy.

Market & Trading Calls

• GDP Growth Revision: Following an aggressive Trump tariff announcement on March 2nd, we revise lower US GDP growth for 2025 to 0.8%, down from 2%. We also increase the chance of a US recession to 50%, up from an existing probability of 20% in early March.
• Inflation Concerns: Despite our expectations for much weaker growth than initially expected, we believe that core CPI-based inflation will remain sticky in a range between 3.2 – 3.5% this year. Elevated tariffs are a central factor, but immigration restrictions, and a continued elevated budget deficit are also driving factors.
• Market Issues Warning: USD is down nearly 1.5% against a broad basket of currencies as US interest rates decline, a sign of growing concerns of a US slowdown. CME Fed futures currently indicate a greater than 50% probability of 75bp of rate cuts by the end of this year, a probability we feel is far too high at this juncture. In our view, the Fed is unlikely to cut more than once unless US economy goes into a full on contraction that heavily weighs on inflation.

Market Analysis

In the afternoon of March 2nd, on the White House lawn, Donald Trump announced the most aggressive US import tariff regime in nearly a century. Estimates of America’s new trade weighted import tariff range from anywhere between 18 – 33%. This is a sizeable increase off an average of just 2.5% in 2024. Hence, there is clearly a need for updates to our US GDP growth and inflation forecasts.

Yearly US Real GDP Growth (%)

Source: World Bank, Kpler

We have steadily revised lower our US GDP growth forecast this year. Entering 2025, I was expecting growth of 2.5%. I narrowed this to 2% in early March amid weakening sentiment, but still held to the belief that Trump would ultimately take a limited approach to tariff implementation, with much of the focus centered on China. This was not necessarily a bad strategy given China’s over-investment issues and ever rising trade surplus.

Nonetheless, yesterday’s tariff announcement was aggressive, towards the very upper end of our expected range. The current tariff regime will certainly bring economic pain in the short run. Outcomes over the medium- and longer-run are a bit more unclear and will depend on the extent to which investment is re-shored into the United States. Tariffs to the degree Trump is pursuing are extremely risky. The lack of re-shoring will ultimately equate to a stagnation in US economic prospects. The reversal of said tariff policy if it does not work will also be painful, and it will take time to rebuild trust in the global market.

For this year, we are now estimating headline real GDP growth of just 0.8%, marking another 120bp downward revision from our previous forecast and finishing well below the long-run average (2%). We have also increased the chances of an outright recession to 50%, up from 20% in early March. The main takeaway is that US economic outcomes this year have fallen dramatically relative to the environment just three months ago.

Daily USD Rate of Change Against Nov 1 2024 Baseline (%)

Source: FMP

The markets are certainly signaling deep concerns around the prospects for the US economy. 10y bond yields, which often signal concerns about growth, are declining rapidly. As of 1PM CST, 10y yields were holding at 4.04%, marking the lowest level since early-October, and breaking convincingly below the 4.16% floor of resistance in place for the past four months. A test of 4.02% looks likely in the next few days.

Movement in USD also reveals a decline in US growth expectations and reflects the decline in US interest rates. Typically, currencies tend to appreciate when tariffs are implemented. In early-February, when potential Canadian and Mexican tariffs nearly went into force, USD appreciated rapidly. This time we are seeing the opposite move. As of 1PM CST, USDX, a weighted index of USD against a basket of currencies, was trading down 1.45%, the largest single day decline since November 2023. EUR/USD, in particular, is surging, up more than 1.5%, placing the exchange rate above 1.10, a level we have not seen since early October of last year. A rising EUR/USD implies a weaker Dollar.

Concerns about inflation also remain front-and-center. We have long held to the sticky inflation assumption for 2025. Coming into this year, I argued core CPI-based inflation over a six month measurement period would average 3 – 3.5%. I’m going to adjust the bottom end of this range up slightly and assume inflation gets stuck in a range between 3.2 – 3.5% this year.

US One- and Six-Month Rate of Annualized Core CPI-Based Inflation (%)

Source: BLS

The Fed is in a difficult position. Growth outlooks are weakening at the same time inflation expectations are rising. Assuming the US economy does not fall into outright recession, Fed cuts look unlikely given elevated inflation expectations. At most we expect no more than one 25bp cut in H2 of this year. I would expect a more hawkish Powell in April.

Short duration bond markets appear to be leaning towards growth concerns over sticky inflation as well. The 1y government bond yield is currently trading at 3.93% (as of 1PM CST), down 10bp from the previous day close. Before the tariff announcement, 1y yields indicated roughly a single rate cut over the next year, assuming a median Fed Funds rate of 4.375%. With the decline in yields today, the bond market seems to be giving the edge to a two rate cut scenario. CME futures on Fed cut expectations are currently trading a greater than 50% probability that rates will be cut by at least 75bp, a probability we feel is far too high at this juncture.