Under the "double strangulation" of Trump's tariffs, the U.S. economy sounds the alarm for stagflation

According to the latest survey, the policy uncertainty of the Trump administration, along with comprehensive new tariffs, is jointly pushing the U.S. economy toward a stagflation outlook.

A survey that aggregates the GDP and inflation forecasts of 14 economists shows that the economic growth in the first quarter is expected to be only 0.3%, a significant slowdown from 2.3% in the fourth quarter of 2024, potentially marking the weakest performance since the pandemic recovery period in 2022.

Meanwhile, the core PCE inflation indicator favored by the Federal Reserve is expected to remain at a high level of 2.9% for most of the year, only falling back in the fourth quarter. Behind the bleak GDP forecast, the decline in consumer and business confidence has begun to reflect in actual economic activity.

Data from the U.S. Department of Commerce shows that real consumer spending adjusted for inflation only slightly increased by 0.1% in February, compared to a contraction of -0.6% previously. Action Economics has significantly lowered its spending growth forecast for this quarter from 4% in the fourth quarter to 0.2%.

Barclays' weekend report noted: "As earlier confidence indicators have worsened, evidence of slowing real economic activity is becoming more compelling." Another factor is the surge in imports flooding into the U.S. before the tariffs take effect (imports will lower GDP statistics).

The good news is that the impact of the import shock will weaken; among the 12 economists surveyed, only two predict negative growth in the first quarter, and no one expects the economy to shrink consecutively. The lowest forecast from Oxford Economics (Q1 at -1.6%) believes that the drag from imports will continue, but expects GDP in the second quarter to rebound to 1.9%, as these imports will ultimately translate into growth momentum through inventory or sales channels.

Rising recession risks

Most economists predict that the economy will gradually recover: GDP growth of 1.4% in the second quarter, 1.6% in the third quarter, and rising to 2% in the fourth quarter. However, the danger is that the weak growth of 0.3% could easily slip into negative territory. With new tariffs taking effect this week, not everyone is confident about a rebound.

Mark Zandi, chief economist at Moody's Analytics, warned: "Although the baseline forecast does not show actual GDP contraction, considering the escalation of the global trade war and the Department of Government Efficiency's (DOGE) layoffs and spending cuts, GDP is likely to show negative growth in the first and second quarters this year. If the president fails to adjust tariffs before the third quarter, an economic recession may become inevitable."

Moody's expects a growth rate of only 0.4% in the first quarter, rebounding to 1.6% by the end of the year, still below trend levels.

Persistent inflation will complicate the Federal Reserve's ability to respond to slowing economic growth. The core Personal Consumption Expenditures (PCE) growth rate is expected to be 2.8% this quarter, rising to 3% next quarter, and roughly maintaining this level until it drops to 2.6% a year later.

Although the market seems to anticipate that the Federal Reserve will cut interest rates, it may be difficult for the Fed to justify a rate cut unless inflation begins to decline more noticeably by the end of the year