The economy is showing signs of weakening

The weekend agreement between the United States and China to significantly scale back steep reciprocal tariffs during a 90-day trade war pause is projected to give a notable boost to U.S. economic growth in 2025, ease inflationary pressures, and lower the likelihood of a recession, according to economists.

However, some analysts warn that the truce may prove short-lived, as the two sides were unable to finalize a broader trade pact during former President Donald Trump’s first term.

How are markets reacting?

Investors welcomed the news. By early afternoon Monday, the Dow Jones Industrial Average had surged roughly 900 points, while the S&P 500 rose 2.5%, signaling renewed market optimism.

Economic Outlook Improves

Kathy Bostjancic, Chief Economist at Nationwide, revised her forecast upward, now expecting the U.S. economy to expand by 0.5 to 1 percentage point from Q4 2024 through year-end 2025 — a meaningful upgrade from her previous call for flat growth. Still, that would mark a slowdown from last year’s nearly 3% expansion.

UBS economists are slightly more reserved, projecting a 0.4% increase in GDP for the same period.

Inflation Eases

Bostjancic also sees inflationary pressures cooling. She now forecasts annual inflation to peak at 3.4% by year’s end, a drop from her earlier 4% projection. Current inflation is tracking around 2.5% based on a blend of key measures.

“The U.S. and China cut the embargo-style tariffs more than expected, helping to avert a recession,” Bostjancic wrote in a client note on Monday.

Recession Risk Recedes

Ryan Sweet, Chief U.S. Economist at Oxford Economics, has also downgraded his odds of a 2025 recession from over 50% to 35%, citing the reduced trade friction as a key driver.

What’s in the U.S.-China Agreement?

As part of the deal:

• The U.S. will lower tariffs on Chinese imports from 145% to 30%
• China will slash duties on American goods from 125% to 10%
• China will also remove “non-monetary” trade barriers, including restrictions on exports of critical minerals

The originally steep tariffs — likened to an embargo by some economists — were expected to drive up consumer prices and weaken household purchasing power, potentially leading to stagflation (the rare mix of high inflation and low growth).

Though the highest duties are now on hold, and many import levies on other countries were suspended last month, UBS notes the average U.S. tariff rate remains around 15%. That’s down from 24% pre-deal but still far above the 2–3% average prior to Trump’s presidency.