US Daily: Raising Our Growth Forecast and Lowering Our Recession Odds in the Wake of a US-China Trade Deal (Hatzius / Mericle / Phillips / Walker)

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Raising Our Growth Forecast and Lowering Our Recession Odds in the Wake of a US-China Trade Deal

12 May 2025 | 4:04PM EDT | Research | Economics

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The Trump administration announced a 90-day pause in the retaliatory tariffs imposed in April, which will leave the US and China with 2025 tariff increases of +30pp and +15pp, respectively. While we had expected a de-escalation, the rate is lower than the +54pp tariff hike we had penciled into our baseline.
We expect this move to leave the US effective tariff rate increase at +13pp, assuming that likely sectoral tariffs on pharmaceuticals and semiconductors take effect, slightly below our previous assumption of +15pp.
In light of these developments and the meaningful easing in financial conditions over the last month, we are raising our 2025 growth forecast by 0.5pp to 1% Q4/Q4 and reducing our 12-month recession odds to 35%.
Under our new economic baseline, the rationale for rate cuts shifts from insurance to normalization as growth remains somewhat firmer, the unemployment rate rises by somewhat less, and the urgency for policy support is reduced. We expect the Fed to begin a series of three cuts later than we had previously expected (Dec. vs. our prior expectation of July) and to implement them at every other meeting rather than sequentially.

Raising Our Growth Forecast and Lowering Our Recession Odds in the Wake of a US-China Trade Deal

The US and China announced that their tariffs on each other will decline by 115pp, leaving an increase of +30pp for US tariffs on China in 2025 and +15pp for China’s tariffs on the US. These lower rates will be effective for 90 days, after which rates on both sides would rise by 24pp unless a further pause is agreed to. The US-China joint statement states that the US and China will establish an ongoing dialogue on economic and trade relations, while the White House fact sheet on the issue implies that the two countries will work towards a rebalancing of trade. In his remarks, President Trump alluded to additional concessions on non-tariff barriers China would make, but these were not mentioned in the White House release.

Over the next few weeks, the Trump administration looks likely to announce other preliminary trade deals, which might lower the US effective tariff rate slightly further. For other US trading partners, the lower US rate on China adds to the argument that reciprocal tariff rates on other countries are unlikely to be implemented at the end of the 90-day pause in July, as we expect that the US will want to maintain higher rates on China than on other trading partners. However, we continue to believe there is a risk that President Trump threatens to impose reciprocal tariff rates on at least a few trading partners before the end of the 90-day pause, which he has alluded to over the last week.

We expect this move to leave the US effective tariff rate increase at +13pp in 2025 vs. our previous baseline of +15pp, assuming that sectoral tariffs (pharma and semis) the Trump administration is reviewing take effect. The limited change to our baseline for the effective tariff rate reflects 1) that we had already assumed in our forecasts that both sides would reduce their very high tariff rates and 2) that at very high levels of tariffs, substitution and rerouting of imports toward lower-tariff countries limit the impact of further increases on the overall effective tariff rate.

Exhibit 1: We Now Expect the Effective Tariff Rate to Increase by 13pp

1. We Now Expect the Effective Tariff Rate to Increase by 13pp. Data available on request.

Source: Department of Commerce, Goldman Sachs Global Investment Research

The slightly smaller increase in the effective tariff rate and the reduced incentive to shift import demand away from China and toward higher-cost but lower-tariff countries implies a slightly smaller increase in consumer prices. We have lowered our core PCE inflation path to peak at 3.6% (vs. 3.8% previously).

That smaller increase in prices will correspond to a smaller tax-like hit to real disposable income and somewhat firmer consumption growth. Combined with the meaningful easing in financial conditions over the last month, we now estimate a peak hit to year-over-year GDP growth from tariffs of 1.4pp (vs. 1.8pp previously). As a result, we have raised our 2025 Q4/Q4 GDP growth forecast by 0.5pp to 1.0%. We now forecast a more modest increase in the unemployment rate to 4.5% in December 2025 (vs. 4.7% previously).

Exhibit 2: We Have Raised Our 2025 Q4/Q4 GDP Growth Forecast by 0.5pp to 1%, Reflecting Smaller Drags from Tighter Financial Conditions and Higher Prices

2. We Have Raised Our 2025 Q4/Q4 GDP Growth Forecast by 0.5pp to 1%, Reflecting Smaller Drags from Tighter Financial Conditions and Higher Prices. Data available on request.

Source: Goldman Sachs Global Investment Research

In light of the somewhat smaller hit to GDP growth, the reduced risk of US-China tariffs high enough to cause production disruptions, and the encouraging signal about future tariff policy decisions, we are lowering our 12-month recession probability to 35% (vs. 45% previously).

Exhibit 3: We Have Lowered Our One-Year Recession Odds to 35%

3. We Have Lowered Our One-Year Recession Odds to 35%. Data available on request.

Source: Bloomberg, Goldman Sachs Global Investment Research

Under our new economic baseline, we continue to expect the Fed to deliver three further 25bp cuts. However, the rationale for cuts in our forecast shifts from insurance to normalization as growth remains somewhat firmer, the unemployment rate rises by somewhat less, and the urgency for policy support is reduced. As a result, we now expect three 25bp cuts at an every-other-meeting pace starting at the December FOMC meeting vs. our previous forecasts of sequential cuts starting at the July meeting. Our forecast for the terminal rate range is unchanged at 3.5-3.75%.

Exhibit 4: We Now Expect Three Every-Other-Meeting Rate Cuts Starting in December 2025

4. We Now Expect Three Every-Other-Meeting Rate Cuts Starting in December 2025. Data available on request.

Source: Goldman Sachs Global Investment Research

Jan Hatzius

David Mericle

Alec Phillips

Ronnie Walker

Appendix: Our Country-Level Tariff Assumptions

Source: White House, Department of Commerce, US International Trade Commission, Goldman Sachs Global Investment Research

Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html.