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Analysts at Morgan Stanley have slashed their prediction for U.S. economic growth this year and projected a sharp firming in inflation, citing possible disruptions from President Donald Trump’s tariff agenda.

In a note to clients, the strategists led by Michael Gapen said they now expect real U.S. gross domestic product to come in at 0.8% in 2025 and 0.7% in 2026, down from their earlier forecasts of 1.5% and 1.2%.

Headline and core personal consumption expenditures -- a key gauge of inflation closely watched by the Federal Reserve -- are also tipped to stand at 3.4% and 3.9%, respectively, by the end of the year. These would be about a full percentage point higher than previous expectations, the analysts flagged.

The unemployment is seen increasing to 4.9%, as higher uncertainty around the trajectory of Trump’s tariffs weighs on business confidence and hiring.

Although they are not anticipating a recession for the U.S. economy, "the gap between a sluggish growth outlook and a downturn has narrowed," the analysts said.

"Our narrative entering the year was ’slower growth, stickier inflation.’ In our March revisions our narrative shifted to ’slower growth, firmer inflation’ since an earlier implementation of tariffs was halting disinflation at a higher pace of inflation. Now our narrative is squarely in the realm of ’even slower growth and sharply firming inflation.’"

The analysts noted that the scope of some of Trump’s tariffs could be "negotiated lower," although they acknowledged that previously "underestimated both the speed of tariff implementation and the level of tariffs put in place."

Markets are still attempting to understand if the Trump administration plans to permanently impose the tariffs, which include a minimum 10% levy for all U.S. imports and targeted rates of up to 50%, or use them as a cudgle during negotiations with trading partners. On Monday, Trump said "both can be true."

U.S. Trade Representative Jamieson Greer is due to tell the Senate Finance Committee on Tuesday that he has been approached by almost 50 countries asking to discuss Trump’s sweeping tariffs, according to media reports.

Greer will say in written testimony that several of these countries, like Argentina, Vietnam, and Israel, have suggested they will bring down their tariffs and non-tariff barriers, Reuters reported.

Source: Investing

Feeling boxed into a corner by the United States' intensifying tariff assault on China and any country that buys or assembles Chinese goods, is bracing for an economic war of attrition.

Washington last week imposed import tariffs of at least 10% on almost the entire world, and much higher levies on countries such as Vietnam, where Chinese factories have been shifting production. This drew retaliation from China, followed by new threats of escalation from U.S. President Donald Trump.

"Whoever surrenders first becomes the victim," said a Chinese policy adviser, asking for anonymity due to the topic's sensitivity. "It’s a matter of who can hold out longer."

China has no great options, though. It will court other markets in Asia, Europe and the rest of the world, but this may not be much of an escape valve.

Other countries have much smaller markets than the U.S., and local economies are also taking a hit from the tariffs. Many are also wary of allowing more cheap Chinese products in.

Domestically, a currency devaluation would be the simplest way to cushion the tariffs' impact but that could trigger capital outflows, while also alienating trade partners China may try to court. China has so far allowed very limited yuan depreciation.

More subsidies, export tax rebates or other forms of stimulus could be on the cards, but this also risks exacerbating industrial overcapacity and fuelling more deflationary pressures.

Analysts have advocated for years for policies that would boost domestic demand.

But despite Beijing's declarations, little has been done to meaningfully increase household consumption, given that the bold policy shifts that would be required could prove disruptive to the manufacturing sector in the short term.

Hitting back with its own tariffs and export controls may not be very effective, given China ships to the U.S. about three times as much in goods than around $160 billion it imports. But it may be the only option if Beijing believes it has a higher pain threshold than Washington has.

So far China has responded to last week's additional 34% U.S. tariffs with a similar blanket counter-levy. As Trump threatened escalation with an extra 50% hike, Beijing vowed to "fight to the end".

"China cannot inflict as much pain on the U.S. as it receives, since it runs the big trade surplus and, rare earths aside, still has more to lose from export controls," said Arthur Kroeber, head of research at Gavekal.

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