Peterson Institute: Under the tariff stick, the growth rate of the U.S. economy may nearly stagnate

According to the latest outlook report released by the Peterson Institute for International Economics, although the United States may avoid falling into recession this year, overall economic growth will significantly slow down. The report specifically points out that one of the key factors leading to the economic slowdown is the evolution of federal policies, particularly the recent tariff increases promoted by President Trump.

Karen Dynan, a non-resident senior fellow at the Peterson Institute and a professor of economics at Harvard University, stated, "Tariffs are driving up prices, weakening real incomes, and disrupting supply chains." Additionally, tighter immigration policies and budget cuts from the Department of Government Efficiency (DOGE) will also have a direct impact on the U.S. economy.

Dynan noted that immigration has provided significant momentum to the U.S. economy in recent years, and now stricter immigration enforcement is expected to limit the "dual development" of labor supply and consumer demand. At the same time, the DOGE's budget cuts may lead to "operational disruptions," further weakening economic vitality.

The report predicts that the annualized growth rate of real Gross Domestic Product (GDP) in the United States will slide to only 0.1% by 2025, far below last year's 2.5%, and will moderately rebound to 1.2% in 2026. Although there may be negative growth in a certain quarter this year, the overall annual growth will still show slight expansion.

Regarding inflation, the report forecasts that the Personal Consumption Expenditures Price Index (PCE), an important measure of inflation, will rise to a high of 4% to 4.5% in the second half of this year. In February of this year, the PCE year-on-year growth was 2.5%. The latest data for March will be released on April 30.

In terms of the job market, it is expected that by the end of 2025, the unemployment rate in the United States will rise to 5%, slightly decreasing to 4.7% in 2026, while the unemployment rate in March of this year was only 4.2%. Dynan pointed out that the rise in unemployment is mainly due to a reduction in economic output, which will also lead Americans to experience "employment anxiety," in stark contrast to the strong job market in recent years.

Regarding the possibility of falling into recession, Dynan believes that the probability of an economic recession in the United States over the next 12 months is about 40%. She emphasized that the uncertainty surrounding tariff policies, including their duration and scale, is the biggest source of "ripple effects" in the current market. She predicts that corporate activity will stagnate, and consumer spending will also become noticeably conservative.

"This is a real shock to real incomes," said Adam S. Posen, director of the Peterson Institute. "There is too much pressure in the market now, which will ultimately fall on consumers. If the economy is to grow, it can only rely on fiscal policy."

These domestic challenges in the United States will also have global repercussions. The Peterson baseline forecast predicts that global GDP growth will be 2.7% in 2025, slowing by about 0.5 percentage points compared to last year. The growth rate is expected to slightly accelerate to 2.8% in 2026, with Europe and the UK maintaining moderate growth.

"The trade war will harm all countries, but the extent of damage to the United States itself will be the greatest," Dynan pointed out. She further explained that if inflationary pressures caused by tariffs occur simultaneously with economic stagnation and rising unemployment, the Federal Reserve will face an extremely tricky situation "We will have almost no room to alleviate these shocks through monetary policy."

Posen pointed out that even though tariffs and other policies have not yet fully impacted the economy, the Federal Reserve's policy has already appeared too loose, and current inflation remains significantly above the 2% target. He warned that the Federal Reserve is likely to "fall behind the curve" in responding to the next round of economic challenges.

"If the U.S. falls into a true stagflation, where inflation rises and growth remains weak, then the Federal Reserve will face an even more serious lagging problem." He expects that the Federal Reserve will be forced to raise interest rates next year. "The key question is whether the Federal Reserve has enough courage to raise interest rates in a stagflation environment." Posen said, "I think they will ultimately have to do so, although it is a difficult decision."