2025 outlook: Will tailwinds trump tariffs?

Episode Summary

Executive Summary: Goldman Sachs expects another year of above-trend U.S.-led global growth in 2025, but with policy uncertainty rising after the Trump election sweep. Jan Hatzius and Dominic Wilson see tariffs, immigration restrictions, and fiscal easing creating a mixed macro backdrop: growth and equities can still advance, yet inflation, yields, and cross-asset volatility face greater upside risk, especially in a broader tariff scenario.

Main Topics: U.S. growth resilience remains the base case (Priority: 5/5): Jan argues 2025 should still bring above-trend, above-consensus U.S. growth, supported by real income gains and easier financial conditions rather than by post-election policy changes. Policy mix under Trump: tariffs vs. tax cuts and deregulation (Priority: 5/5): The outlook balances drags from tariffs and slower immigration against boosts from tax-cut extensions, further easing, and regulatory loosening that could support business confidence and capex. Inflation outlook and tariff pass-through (Priority: 5/5): Underlying disinflation is expected to continue absent tariffs, but import levies would mechanically raise core inflation and complicate the Fed’s path. Fed cuts likely to continue despite strong growth (Priority: 4/5): Goldman expects the Fed to keep easing because labor-market rebalancing is not complete and policy remains restrictive; growth alone is not a reason to pause. Market pricing, valuations, and bond yields (Priority: 4/5): Dom notes markets have already repriced toward stronger growth and higher yields, so the question is less about direction than whether valuations are now too stretched and whether yields rise for benign or harmful reasons. Risk case: across-the-board tariffs (Priority: 5/5): A universal 10%-20% tariff would materially hit growth, raise inflation, weaken non-U.S. assets, and likely trigger stronger dollar appreciation and more volatile rates. International outlook: Europe and China (Priority: 4/5): Europe is downgraded due to trade-policy uncertainty and sensitivity of firms to tariffs; China faces tariff and structural headwinds but is expected to offset part of the drag with policy easing.

Key Arguments: The U.S. economy’s strength is driven largely by pre-existing fundamentals—real disposable income growth and easier financial conditions—so 2025 should still outperform consensus. Tariffs and weaker immigration are negative for growth, but Goldman’s base case assumes only targeted tariffs on China and autos, not a universal tariff. Extension of 2017 tax cuts, additional moderate tax cuts, and deregulation should provide offsetting support through stronger confidence and investment. Inflation should keep moving toward 2% in the absence of tariffs; the main risk is mechanical tariff pass-through, not a broad reacceleration of underlying inflation. The Fed can keep cutting because its mandate is labor-market focused, and labor utilization has already declined even with strong GDP growth. Bond yields have risen partly because recession fears faded, so higher yields are not necessarily a negative sign if they reflect better growth rather than stickier inflation or fiscal stress. Valuations are stretched in equities and credit, but that is mainly a longer-horizon risk; over the next 12-18 months, cyclical strength can outweigh valuation concerns unless the cycle turns down. A universal tariff would be a major downside shock: lower growth, higher inflation, a stronger dollar, and potentially lower U.S. and European bond yields as central banks respond. Europe is more vulnerable than the U.S. because companies are more sensitive to trade uncertainty; China is better prepared for targeted tariffs but still faces property and demographic headwinds. Portfolio strategy should emphasize diversification, hedging, and optionality, including non-U.S. bonds, a long dollar bias, and protection via options and potentially gold/oil.

Data Points: U.S. GDP growth forecast for 2025: 2.5% - Goldman base case, slightly below its 2024 estimate U.S. GDP growth estimate for 2024: 2.8% - Current Goldman estimate cited in the discussion Real hourly wage growth: ~1.5% pace - Supporting U.S. consumer income growth Financial conditions contribution: ~0.5 percentage point tailwind - Estimated boost to growth versus earlier headwind Core PCE inflation forecast for end-2025: 2.4% - Raised due to expected China and auto tariffs Inflation impact of baseline tariffs: ~0.4 percentage point - Mechanically added to core PCE under Goldman’s baseline Core inflation without tariff effects: ~2% - Goldman’s view on underlying disinflation path Inflation under across-the-board tariff scenario: ~3% or a little higher - If a universal tariff is enacted Tariff growth drag under baseline: A few tenths of a percentage point - With tariffs mostly limited to China and autos Risk-case growth hit from universal tariff: ~1 percentage point - Estimated negative impulse to growth Recession probability over next 12 months: 15% - Goldman’s stated recession risk estimate Probability of across-the-board tariff: ~40% - Alec Phillips’s estimate referenced by Jan Euro area growth forecast for 2025: 0.8% - Below consensus and below trend Euro area consensus growth: 1.2% - Comparison benchmark mentioned by Jan ECB forecast by late 2025: 175 bps easing - Goldman expects further ECB cuts China growth forecast for 2025: 4.5% - After a small downgrade, in line with consensus China forecast downgrade: 0.2 percentage point - Reduction from pre-election outlook Potential tariff drag on China growth: Up to 0.7 percentage point - Expected effect before policy offset Fed funds rate now: 4.5% to 4.75% - Described as still restrictive Expected Fed cuts in early 2025: January and March, then once per quarter in Q2 and Q3 - Goldman’s easing path assumption 10-year Treasury yield level discussed: ~4.40% to 4.50% - Recent post-election repricing in bond yields

Pivotal Quotes: "We expect another year of above trend and above consensus growth and U.S. outperformance relative to other advanced economies." — Jan Hatzius: Core U.S. macro base-case outlook for 2025 "The key known unknown. What is going to happen to tariff policy?" — Jan Hatzius: Identification of the main macro risk to the forecast "The bigger thing for us is generally like what is driving the yield increase?" — Dominic Wilson: Explaining why rising bond yields may or may not be problematic for equities

Implications: Investors should stay tilted toward U.S. growth and equities, but hedge tariff and inflation surprises. Non-U.S. bonds, dollar exposure, and options may be valuable protection if policy shocks trigger a risk-off repricing.