Goldman Sachs updated its recession forecast on Sunday to increase the probability of a recession amid President Donald Trump’s tariff war, adding that its analysis may be downgraded further if more tariffs take effect.
Economists led by Jan Hatzius wrote in a note titled “Countdown to Recession” that they’re increasing their 12-month recession probability from 35% to 45%. They also cut their gross domestic product (GDP) growth forecast for 2025 to 0.5% from Q4 to Q4, citing a “sharp tightening in financial conditions, foreign consumer boycotts, and a continued spike in policy uncertainty that is likely to depress capital spending by more than we had previously assumed.”
The Goldman economists said that their baseline forecast still assumes the effective U.S. tariff rate will rise by 15 percentage points, which they noted “would now require a large reduction in the tariffs scheduled to take effect on April 9.”
“If most of the April 9 tariffs do take effect, then the effective tariff rate will rise by an estimated 20pp once those increases and likely sectoral tariffs take effect, even allowing for some country-specific agreements at a later date. If so, we expect to change our forecast to a recession,” they wrote.
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Goldman Sachs’ analysis noted that while Trump’s 10% minimum tariff has already been implemented, the “reciprocal” tariff plan – which the administration calculated based on bilateral trade deficits – is due to take effect on April 9.
The economists wrote that, amid the uncertainty in the lead up to April 9, a trio of developments has caused the growth outlook to deteriorate.
The first of those developments was financial conditions tightening more than expected after Trump announced his tariffs and China retaliated. They said that was in part because “both announcements were more aggressive than expected.”
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The economists also noted that the firm’s analysis of foreign consumer boycotts and reduced foreign tourism to the U.S. could cause a reduction of 0.1 to 0.2 percentage points of GDP. “Our forecast had already assumed forceful retaliation by foreign governments, but we had not accounted for the effects of a consumer-led response.”
The third factor contributing to the lowered growth forecast is that “measures of policy uncertainty have spiked to levels far above those reached during the last trade war.”
“The effects of policy uncertainty are likely to be much larger than in the first trade war because far more U.S. companies are likely to be affected by uncertainty about the much larger and broader U.S. and foreign tariffs this time, and some could also be affected by uncertainty about other policy areas, such as fiscal and immigration policy,” the economists wrote.
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Goldman Sachs said that in its current non-recession baseline, it’s forecasting the Federal Reserve will move forward with three consecutive 25-basis-point cuts to interest rates starting in July, which would bring the benchmark federal funds rate to a range of 3.5% to 3.75%.
In a recession scenario, Goldman economists wrote they would expect the Fed to cut around 200 basis points over the next year and that, as of Friday’s market close, their probability-weighted forecast implied 130 basis points of rate cuts this year – up from 105 basis points previously due to the increased probability of a recession.
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