(Yicai) March 10 -- The gross domestic product growth rate in the US is likely to be slower this year than last year thanks to a ‘Trumpcession,’ several economists told Yicai. Although the US economy might avoid a technical recession this year, the negative effects of the US’ high tariffs will weigh heavily on growth.

Last week, the US government slapped a 25 percent tariff on goods from Mexico and Canada, starting March 4, and hiked the 10 percent tariff on Chinese products imposed in February to 20 percent.

"Tariffs are about making America rich again and making America great again,” US President Donald Trump said in his address to Congress last week. “And it’s happening. And it will happen rather quickly. There’ll be a little disturbance, but we’re okay with that. It won’t be much."

However, many economists are not as confident about the effectiveness of this policy. UK economics advisory firm Oxford Economics has downgraded its forecast for US economic growth this year, mainly due to the fallout from the tariffs and other policies being put forth by the Trump administration.

“We expect GDP growth in 2025 to be below 2 percent. Our current forecast is about 1.8 percent, down from 2.3 percent last month,” said Nancy Vanden Houten, lead US economist at the Oxford-based company.

Many areas of the US economy, including manufacturing, jobs, the stock market, and the bond market, are showing signs of weakness, especially consumer confidence.

The consumer confidence index tumbled to 98.3 in February, marking the largest monthly drop since August 2021, according to the latest data from the Conference Board. The expectations index even dipped below 80, which has historically been considered a warning sign of an economic recession.

"With labor markets and wage growth remaining decent, low household leverage and wealth effects from housing and investment gains in recent years, consumer spending should remain healthy, but it will be less so than if the latest over-protectionist announcements were not in place," Cameron Systermans, head of the multi-assets division at US consulting firm Mercer’s Asia branch, told Yicai.

Market Jitters

“US stocks plunged 5 percent in just one week, starting Feb. 21, the fastest 5 percent pullback since 2021, with tech stocks leading the way down,” said Jerry Chen, senior market analyst at trading platform Forex. “This round of adjustment is being driven by de-leveraging, declining investor sentiment, and deteriorating expectations for economic growth.”

“The negative effects of tariffs on the economy and the markets are finally registering,” said Mahmood Pradhan, head of global macro economics at Amundi Investment Institute, the research arm of French asset manager Amundi. “Market expectations of growth are also turning down fast, and they expect much lower real interest rates. Only two months ago, the long-term real interest rate in the Tips market was at 2.2 percent, it is now at 1.8 percent.”

Manufacturing is also under pressure. The US car industry accounts for 2.5 percent of the economy, and its supply chain is heavily dependent on Canada and Mexico. US investment bank Citigroup has warned that short-term supply chain disruptions could trim annual GDP growth by 1 percentage point.

Tariffs are mainly having a psychological impact on consumers, and the actual effects are still to be seen, Chen said. Tariffs are more of a negotiation tool for Trump rather than the final goal, especially when it comes to his key allies and trade partners, he added.

Growing Uncertainty

However, since imposing the 25 percent tariff on Mexican and Canadian goods, Trump announced on March 6 that goods eligible for the “US-Mexico-Canada Agreement” would be exempt from tariffs.

"It’s unclear what tariffs will ultimately be put in place or how long they will last. The uncertainty will also weigh on economic activity, making businesses more reluctant to invest in new projects or hire new workers," Houten said.

“Tariffs won’t result in a significantly higher revenue. They are more likely to lead to lower consumption and lower demand,” Pradhan added. “This will undoubtedly raise prices, but even more worrying it will reduce growth – in the US and elsewhere. We would expect to see a substantial amount of retaliation. Canada already has a strong 'Buy Canadian' campaign underway, and it looks like it will be effective, as it targets US goods that have domestic substitutes.”

Rate Cuts

On top of this, an economic slowdown could lead to additional interest rate cuts. Federal Reserve Governor Christopher Waller said he is open to further rate cuts later this year. He mentioned that the changing economic situation and Trump’s tough trade stance have made decision-making more complex.

“We expect that the Fed will be in a position to resume rate cuts later in 2025, after a pause in light of recent upside surprises to inflation,” Systermans said. “We expect inflation to return to the Fed’s 2 percent target, given the US labor market has come back into balance and wage growth is approaching levels consistent with the Fed’s target. If growth is weaker than our expectations, it would be reasonable to assume that more rate cuts are delivered.”

“We think tariffs pose a dilemma for the Fed, but primarily over the short term. But over time, however, slowing growth, along with slowing consumption, will lead to lower inflation, and the Fed should be able to cut rates in the second quarter. Our growth forecast for the US was already lower than consensus, and we expect the Fed policy rate to be at 3.75 by the end of the year,” Pradhan said.

Chen said that, due to a series of economic data and sentiment dragging down the market, the market now expects the Fed to reduce interest rates three times this year, a big jump from the earlier forecast made at the beginning of the year of just one cut.

Editor: Kim Taylor