Escalating trade tensions are anticipated to negatively impact U.S. economic output while driving inflation higher, stated Goldman Sachs. The brokerage's updated forecast incorporates a more significant anticipated impact from tariffs than previously assessed. The firm noted, "We now expect larger tariffs than before, including additional product-specific tariffs alongside a reciprocal tariff that extends beyond mere tariff differentials." This shift in perspective suggests that expanded tariffs will have a more profound effect on the gross domestic product (GDP). Goldman Sachs projects that the GDP will now grow at an annualized rate of 1.7% in the fourth quarter of 2025, revised down from the earlier expectation of 2.2%.
Concurrently, their forecast for the unemployment rate has increased by 0.1 percentage point, now anticipated to reach 4.2%. According to the new assumptions regarding tariffs, core personal consumption expenditures—which the Federal Reserve regards as a critical gauge of inflation—are expected to rise slightly, peaking at around 3% on a year-over-year basis.
This reflects a shift from the earlier expectation of a stable rate in the 2.5% range. Throughout a turbulent trading session on Monday, U.S. indexes fell sharply, with the Nasdaq Composite experiencing a notable decline of 4.1%. In a recent interview with FOX News, President Donald Trump hinted at a forthcoming "period of transition" and did not dismiss the idea of a potential recession occurring in 2025. Additionally, reports indicated that on Friday, Trump delivered a new warning regarding the imposition of tariffs on Canadian dairy and lumber goods.
This statement followed a day after he granted temporary exemptions for certain goods imported from Mexico and Canada. The White House has also recently increased tariffs on imports from China, which retaliated with its own duties on U.S. products. Goldman Sachs has revised its 12-month recession probability upwards to 20%, a rise from the previous 15%.
The adjustment hasn’t been more drastic as the White House retains the ability to retract policy modifications if risks to the economy appear to intensify, as stated in Goldman Sachs’ analysis. Looking ahead, Goldman anticipates that the Federal Reserve will implement interest rate cuts twice in 2025 and once in 2026, targeting a terminal rate of between 3.5% and 3.75%.
However, they clarify that under the revised tariff forecast, these cuts would be characterized as "insurance cuts" rather than adjustments made for normalization purposes..