US economy set for bigger tariff-induced hit, inflation headwinds: Goldman Sachs

Investing.com -- The U.S. economy is set for weaker growth and higher inflation as the tariff impact is likely to be greater than previously feared, economists at Goldman Sachs (NYSE:GS) said in a recent. 

"Larger tariffs are also likely to hit GDP harder. We have reduced our 2025 Q4/Q4 GDP growth forecast to 1.7%, from 2.2% previously," Goldman Sachs economists said.

Goldman Sachs updated its economic forecasts to reflect a new assumption of larger tariffs that raise the effective tariff rate by 10%, compared with a prior assumption of 4.3% .

The White House raised tariffs on China, Canada, and Mexico but then paused tariffs on most imports from Canada and Mexico. But the economists said they now "expect larger tariffs than before, including further product-specific tariffs and a reciprocal tariff that goes beyond simple tariff differentials."

Still, the prospect of a recession is slim, according to the economists, forecasting the odds of a 12-month recession at just 20%, up 15% previously, as the White House has the option to pull back policy changes if downside risks begin to look more serious. 

The labor market, meanwhile, is also expected to feel the impact of tariffs, the economists adding, raising their U.S. unemployment rate forecast by 0.1% to 4.2%, citing recent business surveys.

"Business surveys show an intense focus on tariffs, which were mentioned 20 times in the ISM manufacturing report and 12 times in the non-manufacturing report," Goldman Sachs said.

The backdrop of slower growth, however, is likely to help curb inflation, with the economists now expecting that core PCE inflation will "peak at about 3% year-on-year, versus remaining roughly steady in the mid-2s previously."

The outlook for slower growth and firmer inflation has added fresh worries on whether the economy is headed for stagflation and is likely to continue to weigh on risk appetite. 

"U.S. tariffs are a self-inflicted stagflationary wound and at least until the unfolding trade war eases materially, a risk-off climate will persist," MRB Partners said in a recent note.