Goldman Sachs has raised the probability of a US recession to 35 per cent, citing concerns over rising inflation, escalating tariffs, and weaker economic fundamentals. This marks an increase from their earlier estimate of a 20 per cent probability.

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The global investment bank points to waning confidence among businesses and consumers as key factors in the outlook. Economic indicators suggest that the US economy is slowing down, with GDP growth projections for 2025 reduced to just 1 per cent. Additionally, the unemployment rate is expected to climb to 4.5 per cent by the end of the year.

Bets on US recession rise

A significant driver of these concerns is the ongoing tariff war, which is expected to push inflation higher. Goldman Sachs forecasts that core personal consumption expenditure inflation will rise to 3.5 per cent by the end of 2025, much above the Federal Reserve's target of 2 per cent. This spike in inflation is linked to the anticipated increase in US tariffs, which are now projected to reach 15 per cent in 2025.

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The slowing growth and higher inflation are expected to erode consumer purchasing power further, with real income growth forecasted to average just 1.4 per cent next year. The combination of these economic strains points to a potential recession, especially as early economic data from 2025 shows weak results.

As the US economy faces headwinds, policymakers may have to accept short-term economic pain in order to meet long-term goals, potentially making this period of volatility even more challenging for both businesses and consumers.

(With inputs from the agencies)