Goldman Sachs expects more interest rate cuts from the U.S. Federal Reserve and the European Central Bank and lowered its economic growth outlook for both these regions, as it sees heightened recession risks due to U.S. tariffs.
U.S. President Donald Trump said on Sunday that his reciprocal tariffs to be announced this week will include all countries and not a more limited number, rattling financial markets globally due to fears of an economic slowdown.
U.S. - RECESSION OUTCOME HIGHER, MORE FED RATE CUTS
The Wall Street brokerage increased its 12-month recession probability for the world's largest economy to 35% from 20% and lowered the region's 2025 GDP growth forecast to 1.5% from 2.0%.
Goldman expects the average U.S. tariff rate to rise 15 percentage points (pp) in 2025, 5 pp more than its prior baseline forecast and predicts Trump to announce reciprocal tariffs that average 15% across all U.S. trading partners on April 2.
"Almost the entire (tariff rate) revision reflects a more aggressive assumption for "reciprocal" tariffs," Goldman said in a note on Sunday.
The brokerage estimates the Fed to consecutively cut interest rates in July, September, and November, compared to its previous forecast of two cuts in June and December.
EUROPE TO FARE WORSE THAN US
Europe is expected to fare worse than the U.S., Goldman warned, as it projected the region's economy could enter into a "technical" recession this year.
The brokerage forecasts "little" growth for the rest of 2025, with non-annualised growth of 0.1%, 0.0% and 0.2% in second, third and fourth quarter, respectively.
The brokerage expects Trump to implement a reciprocal tariff on the European Union amounting to 15 pp, raising the total effective tariff rate on the EU by 20 pp.
"We estimate that our new tariff assumptions will lower euro area real GDP by an additional 0.25% compared to our previous baseline, for a total hit to the level of GDP of 0.7% compared to a no-tariff counterfactual by end-2026," Goldman said in a separate note on Sunday.
However, in a more "downside" scenario of tariffs, Goldman sees a total hit of 1.2% to the economy, that could push the euro area into a technical recession in 2025, compared to a no-tariff scenario. The brokerage said it now expects the ECB to deliver an additional cut in July, along with its previous forecast of a rate cut each in April and June.
