Goldman Sachs retracts its recession forecast after Trump's tariff pause

Goldman Sachs has reversed its recession forecast for the United States following President Donald Trump's recent decision to impose a 90-day pause on new tariffs. This announcement, made by Trump via Truth Social, momentarily eased market concerns, prompting Goldman Sachs to revert to its previous non-recession forecast.

The initial recession prediction was set earlier the same day when country-specific tariffs came into effect, raising the likelihood of a downturn to 65 per cent. The subsequent pause, however, caused the investment bank to adjust its outlook by early afternoon. 

President Trump's decision to pause additional tariffs excludes those already imposed on China and leaves in place existing tariffs above 10 per cent. Nonetheless, Goldman Sachs, along with other major financial institutions, predicts a significant economic slowdown for the year. Although the pause in tariffs has offered short-term relief, Goldman still forecasts a mere 0.5 per cent growth in the US economy for 2025. JP Morgan, having raised its recession probability to 60 per cent last week, also notes persistent risks despite the tariff suspension.

Furthermore, Citigroup economists have suggested that pausing "reciprocal" tariffs does not eliminate the threat of an economic slowdown. "Pausing reciprocal tariffs excluding China does not mean the US economy has avoided a slowdown in growth and rise in inflation," remarked Citigroup's Andrew Hollenhorst and Veronica Clark. The sentiment is echoed by Neil Dutta, head of US economics at Renaissance Macro, who maintains his recession prediction, stating the pause only changes the nature of the risk.

While the suspension of some tariffs suggests a shift toward more predictable risks, sector-specific tariffs at a rate of 25 per cent are expected to persist. Goldman Sachs economists noted: "This announcement leaves in place all prior tariffs and the 10% minimum portion of the ‘reciprocal’ tariff, and we continue to expect additional sector-specific tariffs at a 25% rate." Despite the pause, they foresee cumulative tariffs aligning with previous expectations.

In the broader economic landscape, JPMorgan's Chief US Economist Michael Feroli anticipates a delay in interest rate cuts by the Federal Reserve, likely pushing them to September. He comments, "The drag from trade policy is likely to be somewhat less than before, and thus the prospect of a recession is a closer call," but warns of a probable contraction in real activity later this year. The ongoing adjustments in trade policy underscore the fragile state of the economy, where the temporary pause on tariffs provides only a partial reprieve from potential recessionary pressures. 

Despite the temporary halt, tariffs on China were raised to 125%, indicating President Trump's continued dedication to pressuring Beijing. Officials from the administration asserted that the tariff approach was aimed at bolstering both US economic and national security concerns. Nonetheless, critics, including certain Republican legislators, criticized the tariff escalation as disruptive and harmful to business sentiment.