Apollo Global Chief Economist: If high tariffs persist, the U.S. will "definitely" fall into recession in 2025

Asset management giants warn that if the current high tariff policies persist, the United States will "absolutely" fall into an economic recession by 2025, potentially leading to a 4 percentage point decline in GDP.

Apollo Global Management Chief Economist Torsten Slok stated in an interview with CNBC on Monday that if the current high tariff levels remain unchanged, a recession in the U.S. by 2025 is a foregone conclusion, "It completely depends on whether tariffs stay at these levels; if they do, we will absolutely fall into a recession in 2025."

Slok predicts that if high tariff policies continue to be effective, the probability of the U.S. economy contracting for two consecutive quarters could be as high as 90%, with GDP declining by 4 percentage points. This grim forecast far exceeds the pessimistic expectations of other Wall Street institutions, such as JP Morgan Asset Management's David Kelly, who previously predicted a 60% probability of recession.

U.S. Economy Under Tariff Shock: Recession Risk Soars to 90%

Apollo's data shows that it takes the U.S. an average of 18 months to complete a trade agreement negotiation. The lengthy process is primarily due to the complexity of trade negotiations, which involve a line-by-line review of each country's imported goods and negotiating tariffs for each product category.

Negotiations also include discussions on non-tariff barriers, tax differences, rules of origin, intellectual property, labor standards, environmental standards, anti-dumping measures, dispute resolution, digital trade and e-commerce, government procurement, and sometimes even security and defense considerations.

During the period when the U.S. is negotiating trade with 90 countries, global trade is stagnating, facing issues similar to those during the COVID-19 pandemic: supply chain challenges are intensifying, potentially leading to shortages in U.S. stores within weeks, rising inflation in the U.S., and a decrease in tourism to the U.S.

According to Apollo's research, if current policies remain unchanged, the U.S. economy may face what is termed a "Voluntary Trade Reset Recession" (VTRR), with a probability as high as 90%.

To quantify this negative impact, one can compare the current tariff increases to the situation during the trade frictions of 2018. During the 2018 trade frictions, the average tariff rate in the U.S. increased from 2% to 3%, and research showed that the negative impact on GDP ranged from 0.25% to 0.7%.

Using these most conservative estimates to calculate the impact of current tariffs increasing from 3% to 18%, the negative impact on GDP by 2025 could approach 4 percentage points, not including the additional nonlinear effects brought about by increased uncertainty in consumer spending decisions and business planning.

Small Businesses Become the Biggest Victims, Unemployment Wave May Be Coming

Slok particularly emphasized that high tariffs will have a devastating impact on small businesses, as they often do not have sufficient cash reserves to cover these additional costs. Slok explained, "Therefore, if this situation continues, we will see a very significant scale of retailer bankruptcies."

Research released by Apollo shows that small businesses account for over 80% of total employment in the United States and are also a major source of capital expenditures. Due to their long-term reliance on a stable U.S. trade system, the sudden implementation of high tariffs will force them to adjust immediately, while many businesses simply do not have enough working capital to pay these tariffs.

This shock could lead to ships being stranded overseas, orders being canceled, and even well-operated family retail businesses filing for bankruptcy. Any downturn in the retail sector will ultimately harm the labor market and consumer confidence. According to Apollo's data, small businesses with fewer than 500 employees account for 80% of total employment in the United States.

He specifically reminded investors to closely monitor the weekly initial unemployment claims report, as weakness in the labor market will first manifest here. Slok stated, "We have not yet seen this in the initial unemployment claims data, but we expect to see this situation."