At the beginning of the year, Oxford Economics had a US gross domestic product (GDP) forecast for this year of 2.4 per cent, in line with most other major economic forecasters. Again, in line with many economic forecasters, it reduced its forecast to two per cent in March for 2025, entirely because of the Mexico-Canada tariffs and their effect on investment, inflation, Federal Reserve interest rate policy, and consumer sentiment.

Last week Wednesday a new minimum 10 per cent tariff was applied to all US trading partners, and “reciprocal” tariffs were imposed, ranging from 11 per cent on the Democratic Republic of Congo to 49 per cent for Cambodia, including the European Union at 20 per cent. Most importantly, an additional 34 per cent tariff was imposed on mainland China, which, when combined with the recently already-implemented 20 per cent, means its tariffs are already higher by 54 per cent this year. Notably, China announced its retaliation of an equivalent tariff of 34 per cent on April 10 and has been threatened with further tariffs of 50 per cent as well as the potential 25 per cent tariff on the countries importing Venezuelan oil.

Most of the additional tariffs were calculated based on a formula which divides a country’s trade surplus with the US by its overall merchandise exports to the US (and then divides by two to get an applied percentage tariff rate). The main target is economies that run the largest bilateral trade surpluses with the US, with the apparent goal being to reduce bilateral surpluses to zero.

Modelling the tariffs, Ernst and Young’s Gregory Daco (formerly of Oxford Economics) stated that if tariffs remain in place indefinitely, without exemptions or exclusions, they will lead to stagflation with a drag on US real GDP growth of 1 per cent in 2025, while the increased cost of imports would add one point to US consumer price inflation by the end of 2025. This is in line with many forecasts, although, as Ernst and Young notes, it doesn’t include the impact of retaliation by other countries or the adverse financial market reaction such as has already occurred. Some other economists have projected nearly double the impact on growth and inflation or closer to 2 per cent each.

Simultaneously, on Thursday and Friday last week, the Standard & Poor’s (S&P) 500 and the Nasdaq plunged 9.9 per cent and 10.7 per cent, from April Fools’ Day, the day before Liberation Day, through Friday’s close. And before the market opened Monday morning, they were down 17.4 per cent and 22.7 per cent from their respective record highs on February 19 and December 16, with a mixed recovery after wild trading on Monday.

According to Yardeni Research, industry analysts have been lowering their S&P 500 earnings per share estimates, but they remain high at US$268.85 and US$307.03 for 2025 and 2026, still up 9.2 per cent and 14.2 per cent or a forward price earnings ratio of roughly 18. Even before all the tariff talk, these Wall Street estimates were, in my view, way too optimistic and will fall a lot more if the current tariff turmoil causes a recession.

On April 6, US investment bank Goldman Sachs lowered its GDP growth forecast for 2025 to 0.5 per cent and raised its 12 month recession probability from 35 per cent to 45 per cent following what it described as “a sharp tightening in financial conditions, foreign consumer boycotts, and a continued spike in policy uncertainty that is likely to depress capital spending by more than we had previously assumed”.

Critically, its forecast still assumes that the effective US tariff rate will only rise by 15 per cent in total rather than the roughly 20 per cent effective rate increase which would now require a large reduction in the tariffs scheduled to take effect today. It adds that if the full tariff impact occurs (meaning also likely sectoral tariffs and allowing for some country-specific agreements) they expect to change their forecast to a US recession. Many of the largest global investment banks have now increased their recession forecasts to above 50 per cent (JP Morgan is at 60 per cent) due to the likelihood of further retaliation and financial market disruption.

There are signs, however, in line with Goldman Sachs’s projections, that some of the tariffs are meant to be negotiated down. The first test will be Israel, which now appears to be the US’s strongest ally. Prime Minister Benjamin Netanyahu visited the White House Monday following the US imposition of a 17 per cent tariff on that country despite the fact that Israel had pre-emptively removed all its tariffs on US products in an attempt to avert being among the targeted. Japan, at 24 per cent, will also begin direct negotiations today, and many other Asian countries — for example, Vietnam and Korea — are expected to follow immediately after.

Without a recession, Goldman Sachs now expects the Fed to make three-quarter point interest rate cuts starting in June, lowering the Fed funds rate to between 3.5 per cent and 3.75 per cent. In a recession scenario, it expects the Fed to cut by 2 per cent.

Friends at 10

Jamaica, like most of the Caribbean countries (with the notable exception of Guyana) and Latin American, only got the minimum 10 per cent duty rate. Nevertheless, the region will have to make choices, particularly as to whether it will respond by way of a regional industrial policy or a more free trading “Panama” style approach. It is, however, too early to decide which approach is best, but it needs to be studied.

While a US recession will impact our tourism (the removing of the travel advisory would help offset some of the impact), a sharp slowing in US and global growth (never mind a global recession) would reduce oil prices further, perhaps below US$50 a barrel, and the longer term global deflationary impact on goods could allow us to cut interest rates. In such a scenario, it is quite possible our much cheaper local stock market does better than the US stock market this year.

Keith Collister