US economy contracts in Q1 due to fresh tariff measures, worries about economic recession intensify
The U.S. economy took a hit in Q1 2025, with GDP shrinking by 0.3%. This downturn can be attributed to the aftermath of new tariff policies, which have led to increased uncertainty and dampened confidence among businesses and consumers [1].
The Bureau of Economic Analysis (BEA) reported that the GDP growth in Q4 2024 was a robust 2.4%, but this growth was short-lived [1]. The primary causes of the shrinkage in Q1 2025 were an increase in imports and a decrease in government spending [1]. However, these movements were partly offset by increases in investment, consumer spending, and exports.
Nevertheless, the biggest drag on GDP came from net exports, which subtracted 4.83 percentage points from the total, the most on record [1]. This indicates that companies were actively stockpiling goods out of fear of higher tariffs in the future.
Consumer spending, which represents two-thirds of the GDP, grew at a sluggish 1.8% pace in Q1 2025, significantly slower than the 4.0% rate in Q4 2024 [1]. On the other hand, federal government spending shrank by 5.1%, which subtracted 0.33 percentage points from the total GDP [1].
These discouraging figures have sparked worries about a potential recession. While some experts believe the current contraction does not signal the start of a recession, others are more pessimistic [1]. Notably, Adam Posen, president of the Peterson Institute for International Economics (PIIE), has put the US recession risk at 65% [1]. He emphasizes the role of policy uncertainty in exacerbating economic concerns.
Gary Clyde Hufbauer, a non-resident senior fellow at the PIIE, feels that a recession is likely in the second half of 2025 [1]. Pessimistic forecasts are also backed by the Kobeissi Letter, a financial publication, which predicts a recession based on multiple indicators [1].
Former U.S. Treasury Secretary, Lawrence Summers, has criticized the administration's economic policies, stating that they have had a disastrous impact on the economy in the first 100 days [1]. He attributes the negative economic indicators, such as plummeting stock prices, a falling dollar, rising unemployment and inflation forecasts, and collapsing consumer confidence, to the Trump administration's misguided economic policies.
Darrell West, Senior Fellow at the Brookings Institution, shares a similar view, asserting that the current state of the economy is a significant blow to Trump [1]. He argues that the President inherited a strong economy from his predecessor but squandered the opportunity through ill-advised policies. If the second-quarter GDP number comes in negative, it could earn the label of the "Trump recession." [1]
In light of the current economic conditions, experts suggest precautionary measures for individuals and businesses, such as diversifying investments globally, obtaining second residencies, and managing bank accounts across multiple countries [1]. Diversifying stock portfolios, real estate investments, and businesses in foreign markets are also recommended strategies [1].
References:1. "U.S. economy at risk of recession due to tariffs and uncertainty: economists warn." Xinhua, 16 April 2025.
Additional Information:
- Recession Odds and Economic Factors: The likelihood of a recession varies among experts. Goldman Sachs estimates the odds at about 45% within the next 12 months, while J.P. Morgan believes the chance is 60% [2][3]. Other economists, like Posen, place the odds even higher, at 65% [3].
- Trade Policy Impact: The implementation of new tariffs by the Trump administration is seen as a major factor contributing to the increased risk of recession. Goldman Sachs mentioned that tariffs could lead to reduced capital spending and economic growth [2].
- Economic Growth Forecasts: Goldman Sachs has lowered its GDP growth forecast for 2025 to about 0.5%, down from 2.8% in 2024. If most of the announced tariffs are implemented, they expect their forecast to shift towards predicting a recession [2].
- Inflation Concerns: There are concerns about potential stagflation, a combination of stagnant economic growth and high inflation. Economists like Bill Dudley suggest that tariffs could lead to inflation as high as 5% over the next six months [3].
- Consumer and Business Confidence: Declining consumer and business confidence are also significant indicators of a potential recession. The uncertainty surrounding economic policies has further exacerbated these concerns [2][3].
- The government's tariff policies, implemented by the Trump administration, have probably added to the unease among businesses and could have reflected in the reduction of business confidence, potentially contributing to the contractions in the economy.
- The stockpiling of goods by companies, individually and across industries, could have been a probable reaction to the uncertainty brought by the new trade policies, possibly leading to net exports acting as a significant negative factor in the GDP growth.
- As a result of the economic downturn, finance, business, and political news outlets have been filled with discussions about potential solutions and emerging economic trends, as well as the impact of the current state of the economy on various business sectors and consumer spending.
- The declining GDP growth and the potential of a recession could affect the financial market, and it is suggested that businesses and investors diversify their portfolio, seeking opportunities in other industries and economies to cushion the effects of any potential economic downturn.
- The economic indicators, such as a shrinking GDP, plummeting stock prices, and declining consumer confidence, have been pointed out by experts like Lawrence Summers as evidence of the negative impact of the Trump administration's economic policies on the US economy.
- Experts advise individuals and businesses to prepare for the possibility of a recession by taking precautionary measures, like obtaining second residencies, managing bank accounts across multiple countries, and diversifying stock portfolios, real estate investments, and businesses in foreign markets.
