Economic outlook brightens, recession odds fall after US-China tariff deal

The U.S.-China agreement over the weekend to slash outsize reciprocal tariffs during a 90-day pause in their trade war is expected to notably boost America’s projected economic growth this year, curtail inflation and reduce recession risks, economists say.

But some forecasters cautioned there’s no guarantee the truce will be sustained after the three-month hiatus and the two nations failed to reach a wide-ranging deal during President Donald Trump’s first term.

Is the stock market improving?

For now, the pact has cheered investors. In early afternoon trading, the Dow Jones Industrial Average is up about 900 points and the S&P 500 index rose 2.5%.

What is the current economic outlook?

Nationwide Chief Economist Kathy Bostjancic now expects the U.S. economy to grow a half percentage point to a percentage point from the fourth quarter of 2024 to the end of this year, up from her prior forecast of flat growth in 2025. That would still be down from the economy’s nearly 3% expansion last year.

UBS is a bit less bullish, predicting a 0.4% rise in economic output.

Is inflation expected to get better?

Bostjancic expects inflation, now running about 2.5% if several measures are averaged, will peak at 3.4% by year’s end, down from her previous 4% estimate.

"The U.S. and China slashed the embargo-like tariff rates more than expected, helping to avert a recession," Bostjancic wrote Monday in a note to clients.

Is inflation expected to get better?

Bostjancic expects inflation, now running about 2.5% if several measures are averaged, will peak at 3.4% by year’s end, down from her previous 4% estimate.

"The U.S. and China slashed the embargo-like tariff rates more than expected, helping to avert a recession," Bostjancic wrote Monday in a note to clients.

The massive tariffs, along with lesser fees on other nations’ imports, were expected to sharply increase prices for U.S. consumers and sap their purchasing power, resulting in an unusual tandem of high inflation and slow growth, or stagflation.

The suspension of the highest duties on China – along with the 90-day pause on  double-digit import taxes on dozens of other nations last month – still leaves the average U.S. tariff rate at about 15%, UBS said. That’s down from 24% before the China pact but well above the 2% to 3% average before Trump took office.

While projected growth will still be weaker than predicted before Trump took office, the deal should substantially reduce recession chances, economists said.

Major retailers were predicting dire product shortages and empty store shelves ahead of the back-to-school and holiday shopping seasons. That supply-chain stress “will be mitigated” by the agreement, Sweet said.

But he added, "A future escalation remains possible, if not likely, as tariffs are used as a negotiating tactic."

In a note to clients, Capital Economics said, "there is no guarantee that the 90-day truce will give way to a lasting ceasefire."

The two sides launched a so-called “comprehensive economic dialogue” in 2017 during Trump’s trade war with China in his first term, the research firm noted.

"Trump canceled that initiative later the same year as the two sides were unable to make meaningful progress and tariffs followed," Capital Economics said.