Tariff reprieve with China likely to avert US recession but not coming slowdown: Economists

Washington – The Trump administration’s

temporary trade deal with China

did not arrive in time to prevent a slowdown in the US economy, forecasters say, even if it reduces the risk of a full-blown recession later in 2025.

Goldman Sachs economists cut the odds of a US recession over the next 12 months to 35 per cent from 45 per cent, while simultaneously lifting its 2025 growth forecast for the economy to 1 per cent from the previously expected 0.5 per cent.

Economists at UBS said the deal “could imply” a 0.4 percentage point boost to their forecast for a 0.5 per cent increase in US gross domestic product in 2025, following 2.5 per cent growth in 2024.

While the current US levy on Chinese imports of 30 per cent is well below the 145 per cent duty put in place over April, it still represents a sharp increase from before US President Donald Trump took office in January. That combination leaves the economy on track to grow significantly less in 2025 than in 2024, even after accounting for the tariff truce.

“The temporary US-China tariff reprieve is a notable de-escalation, but it won’t avert a slowdown,” said EY chief economist Gregory Daco. “Front-loaded demand, elevated price pressures, and acute policy uncertainty will still weigh on hiring and spending.”

Labour market data could start to show the hit to employment by the end of May, economists expect, while accelerating inflation should become evident in reports due in June.

Investors cheered the announcements on May 12 by the US and China of the 90-day reduction in tariffs, sending the S&P 500 to the highest levels in more than two months. Financial markets have also received some support in recent weeks from key gauges of economic activity, which have yet to show real signs of weakness despite warnings from forecasters that pain will soon arrive.

Take retail sales, for example: They jumped in March by the most in two years as consumers rushed to pull forward purchases. Meanwhile, in the labour market, a monthly jobs report published on May 2 showed employers in transportation and warehousing were still staffing up in the first few weeks of April to handle the surge in demand.

One key question is whether households and businesses will take advantage of the 90-day reprieve to do more stocking up. Dr Mark Zandi, the chief economist at Moody’s Analytics, is sceptical. He expects weekly reports on filings for unemployment insurance to start rising by Memorial Day on May 26, foreshadowing a slowdown in hiring that will become clear in the June jobs report.

“There is no change in the outlook. I had expected the administration to soon strike an arrangement with China and other countries, de-escalating the trade war. But the war continues on,” Dr Zandi said. “I would expect the payback for all the forward buying to begin this month, and extend into June and July.”

Mr Trump’s imposition in early April of a 145 per cent tariff on Chinese imports sparked a plunge in container traffic from China to the US – a trip that typically takes 22 days, according to Xeneta, a freight rate benchmarking and market analytics platform. Loading, unloading and distribution adds to the journey.

Mr Gene Seroka, the executive director of the Port of Los Angeles, told The Wall Street Journal he expects import volumes to end May down 25 per cent versus a year ago, and like Dr Zandi, he does not see another burst of frontrunning coming either.

Others – like economists at Comerica Bank and Oxford Economics – predicted the opposite. “US importers are likely to ramp up purchases near-term to hedge against tariffs rising again,” said Comerica’s chief economist Bill Adams in a note.

Inflation impact

Because of the time it takes for goods to traverse the waterways between Shanghai and California, the brunt of the tariffs has yet to be felt in the US. A monthly report on consumer prices for April due on May 13 will probably show inflation was relatively muted, but economists expect bigger price hikes to begin showing in earnest in the May report, to be published in mid-June.

Federal Reserve officials speaking on May 12 also underscored the point that tariffs remain high despite the 90-day reprieve. Fed governor Adriana Kugler told an audience in Dublin that “they appear likely to generate significant economic effects even if tariffs stay close to the currently announced levels”, and Chicago Fed president Austan Goolsbee made similar remarks in a New York Times interview.

Economists said the central bank’s interest-rate decisions in the coming months will depend on whether the labour-market data worsen faster than the inflation data or vice versa, though monetary policymakers are not likely to have much clarity one way or the other by their June 17 and 18 meeting. Investors pushed their bets on the timing of the next rate cut back to September instead of July, according to futures.

“Everybody’s high-fiving and declaring a victory over this, but I would characterise it as a step down from what was essentially a full-blown trade war,” said Mr Tim Quinlan, a senior economist at Wells Fargo. “The growing pains that you’re apt to experience in the interim, you’re only beginning to feel the cost of those in the economic data.” bloomberG