US Economic Forecast: Tariffs update
Newly announced tariffs could significantly slow GDP growth, at least in the next couple of years, before the economy recovers slowly
US trade policy has shifted to be more hawkish than we had initially assumed in our first-quarter US economic forecast. Tariff policy is still evolving, which has created uncertainties about the future path of these trade measures in the United States and the rest of the world. We have generated three new scenarios1 to provide a better understanding of where the US economy may go given higher tariff assumptions.2
On April 2, US policymakers announced a wide range of tariffs on most trading partners: These tariffs would have raised the average US tariff rate to 22.5%, the highest since 1909, according to calculations by The Budget Lab at Yale University.3 Additional tariffs were levied on China in the days following the announcement. Then on April 9, a 90-day pause was announced for many of the tariffs that went into effect earlier that day. This lowered the tariff rate for most countries to 10%, with some specific products, such as steel, aluminum, and autos, remaining at 25%. Tariffs for Canada and Mexico remained at 25% except for goods that were USMCA-compliant. However, China was the main exception in the newest announcement, with tariffs for Chinese imports raised to 125% before being moved even higher.4
Despite the temporary pause, tariffs remain extraordinarily high in the United States. This is partially because even a 100% tariff on China alone, from where the United States derived 13% of its imports in 2024, would raise the average US tariff rate by about 13 percentage points. However, such high tariffs on China is likely to lead to a sharp decline in goods trade between the two countries, bringing the average tariff rate down quickly. Still, even a 10% tariff on all trade partners would be the highest average tariff in the United States since 1946.
Although we had anticipated higher tariffs in our initial first-quarter forecast, we likely underestimated the magnitude of tariff hikes. For example, we had initially anticipated a 10-percentage-point rise in the average tariff rate in our downside scenario. Our baseline and upside scenarios had even lower average tariff rates. We recognize that the tariff process remains fluid, and we will not be able to pinpoint exactly how they will evolve over the 2025 to 2029 forecast period. Nonetheless, we have revised our forecast scenarios to incorporate higher tariff rates to provide readers with a better understanding of the economic implications, should such policies persist (figure 1).
Scenarios
Baseline (50% probability):5 Our current baseline scenario assumes that the average tariff rate rises by 10 percentage points through the end of the forecast horizon in 2029. This is roughly equivalent to maintaining a 10% tariff on all countries, with a 25% tariff on steel, aluminum, motor vehicles, and auto parts. A 10-percentage point rise in the average tariff rate would bring tariffs to their highest point since World War II. The tariffs would raise the price of both final goods for American consumers and costs of intermediate goods for American producers.
We also assume that the tax cuts from the 2017 Tax Cuts and Jobs Act would be extended, and the corporate tax rate would be cut to 15% for American producers. The expansionary effect of tax policy would be offset by federal spending cuts. The forecast assumes deportations of undocumented immigrants would rise by 250,000 people per year, which is slightly lower than the number of deportations in the government’s 2024 fiscal year but is roughly twice the average rate of deportations seen between 2021 and 2024.6 A rise in deportations could reduce the size of the labor force and slow real GDP growth.7
The inflationary effect from tariffs is likely to prevent the Federal Reserve from cutting interest rates in 2025, though it may resume modest cuts in 2026. Meanwhile, high inflation, elevated rates, and culls to the labor force could create a significant drag on consumer spending over the forecast period. Tariffs would slow the pace of international trade, while federal spending cuts would cause a contraction in government spending and investment. However, business investment would likely perk up a bit in 2026, thanks to pent-up demand and the renegotiation of the 2017 tax cuts. Overall, under this scenario, Deloitte forecasts annual real GDP growth would slow considerably to 1.9% in 2025 and 0.8% in 2026. This follows 2.8% real GDP growth in 2024 (figure 1).
Downside (35% probability): In this scenario, we assume that the United States reinstates many of the tariffs it announced on April 2 and keeps them in place through the end of our forecast period in 2029. This includes the 10% minimum tariff on all countries and 25% tariffs on steel, aluminum, motor vehicles, and auto parts. Over the 2025 to 2029 time period, we assume US tariffs on all goods from the European Union would average 20%, while tariffs on goods from China would average 54%. This would bring the United States’ average tariff rate to roughly 20%. We also assume that the European Union and China would retaliate, with China raising tariffs on all US imports to 34% and the European Union raising tariffs on all US imports to 20%.
Meanwhile, we maintain the same assumptions as the baseline scenario around other fiscal policies, including taxes, federal spending, and immigration. That is, the 2017 tax cuts are extended, the corporate rate falls to 15% for domestic manufacturers, the federal government makes moderate spending cuts, and deportations run at a rate of 250,000 per year.
The rise in the average tariff rate would likely cause a sharp contraction in exports and imports, with imports falling more dramatically. Business investment would also fall quickly through the end of 2025, as uncertainty and rising costs force businesses to reevaluate their growth expectations and prepare for a potential recession. Stronger inflation would erode consumer purchasing power, while higher unemployment would further restrain consumer spending. In this scenario, Deloitte forecasts real GDP growth would slow to just 1.5% in 2025 and 0.7% in 2026 (figure 1).
Although our forecast shows positive growth each year, conveying the forecasts at calendar-year intervals obscures a technical recession (two or more consecutive declines in real GDP) that we forecast will begin at the end of 2025. The recovery from the recession is expected to be weak. The economic adjustment from such a policy shock has a lasting impact on sentiment and growth expectations.
Our forecast for this scenario has serious downside risks. Such a large tariff shock is unprecedented in modern times in the United States, and most economic models are ill-equipped to quantify their effects with precision. Financial market volatility and the rise in US bond yields after the April 2 tariff announcements highlight how economic relationships can change in the face of such large shocks. Our forecast maintains that historical economic relationships hold, but we acknowledge that tariff spikes of this magnitude could lead to their undoing.
Upside (15% probability): Our upside scenario assumes that trade tensions ease relative to the baseline. The average tariff rate would rise by 5 percentage points when compared with its 2024 average. This is roughly equivalent to a 10% tariff rate on all trade partners except Canada and Mexico, with 25% tariffs on steel and aluminum. Canada and Mexico would renegotiate their trade agreement with the United States, and tariffs on their imports would fall back to 2024 levels.
Although we maintain our baseline assumption on tax policy, we assume a more dovish approach to federal spending and immigration. Deregulation would also add a modest boost to productivity. This would allow for a more expansionary boost to the economy from federal tax and spending policies relative to the baseline and downside scenarios. In addition, we assume the number of deportations would remain fairly modest throughout the forecast period.
The rise in tariffs under this scenario would be more manageable for the US economy. Although international trade would take a hit, imports and exports would continue to grow, albeit modestly. Uncertainty would restrain business investment growth this year, but policy clarity, with limited additional costs to intermediate goods, would allow for a stronger recovery next year. The inflationary impulse from tariffs would slow consumer spending, but only modestly. Under these conditions, Deloitte forecasts real GDP growth would average 1.9% between 2025 and 2029 (figure 1).
