Goldman Sachs has downgraded its 2025 U.S. economic growth forecast, warning that trade policies are becoming "considerably more adverse" and that the administration is managing expectations for near-term weakness driven by tariffs.

In a note shared Tuesday, Goldman's chief economist Jan Hatzius lowered the firm's 2025 GDP growth projection to 1.7%, down from the 2.4% projection at the start of the year.

“This is our first below-consensus forecast in 2½ years,” Hatzius said.

What's Behind Goldman’s Growth Downgrade?

Goldman's revision does not stem from recent economic data.

The February jobs report was solid, unemployment claims remain low and key business surveys are hovering near their recent averages. But the firm's outlook has changed due to worsening trade policy expectations.

Goldman now sees the average U.S. tariff rate rising by 10 percentage points in 2025—twice its previous forecast and five times the increase seen under President Donald Trump's first term.

The bank assumes the implementation of a broad range of tariffs, including those targeting critical goods, global auto imports and a so-called "reciprocal" tariff that could significantly impact U.S. trade relations with Europe.

“The reciprocal tariff matters most,” Hatzius said, as the administration appears to view Europe's 20% value-added tax as equivalent to a trade tariff.

The investment bank warns that, if implemented mechanically, this tariff alone could raise the average U.S. tariff rate by more than 10 percentage points, with the possibility of it reaching 15 percentage points depending on carveouts.

Tariffs Could Cut Nearly A Full Percentage Point From Growth: Goldman Expects

The expected tariff increases could weigh on the U.S. economy through three main channels, according to Goldman Sachs.

“First, they raise consumer prices—and thereby cut real income—by an estimated 0.1% per 1 percentage point increase in the average U.S. tariff rate,” Hatzius said.

He added that, while in theory, this impact could be mitigated if tariff revenue is recycled into tax cuts, “this revenue will not be scored in the ongoing budget negotiations if it results from executive as opposed to congressional action.”

While Hatzius sees that the effect of tariff hikes on markets this time around may be smaller than during the 2018-2019 trade war, it remains a source of uncertainty for investors.

Lastly, business investment could slow as companies hesitate to commit capital amid uncertainty.

“Trade policy uncertainty leads firms to delay investment,” he said, stressing that this hesitation could further weigh on GDP growth in 2025.

Goldman now estimates that tariffs will subtract 0.8 percentage points from GDP growth over the next year, with only 0.1-0.2 percentage points of that drag offset by tax cuts and regulatory easing.

What About Inflation And The Fed?

Goldman Sachs also raised its inflation forecast, now expecting core personal consumption expenditures inflation—the Federal Reserve's preferred inflation gauge—to rise to 3% later this year, up nearly 0.5 percentage points from its prior forecast.

“In theory, a tariff hike raises the price level permanently but only raises the inflation rate temporarily,” Hatzius said.

Despite the weaker growth outlook, Goldman Sachs has kept its baseline Fed forecast unchanged, still expecting two 25-basis-point rate cuts in June and December.

“Our near-term view is that the FOMC will want to stay on the sidelines and make as little news as possible until the policy outlook has become clearer,” Hatzius added.

On Wednesday, the Bureau of Labor Statistics will release the February’s Consumer Price Index report, with economists headline inflation to slow from 3% year-over-year to 2.9% year-over-year.

Markets remain under pressure, with all major U.S. indices trading below their 200-day moving averages. The tech-heavy Nasdaq 100, tracked by Invesco QQQ Trust , edged up 0.2% on Tuesday but remains down 12.5% from its February peak.

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