Apollo Economist Warns 90% Chance of U.S. Recession by 2025 Due to High Tariffs

Apollo's Chief Economist, Torsten Slok, has issued a stark warning about the potential economic impact of sustained high tariffs on the United States. According to Slok, if current high tariff levels remain unchanged, the U.S. economy faces a 90% probability of contracting for two consecutive quarters by 2025, resulting in a 4% decline in GDP. This grim forecast is significantly more pessimistic than other predictions, such as those from David Kelly of Morgan Stanley, who estimated a 60% chance of recession.

Slok's analysis highlights the severe consequences of prolonged high tariffs on various sectors of the economy. He notes that tariffs would particularly devastate small businesses, which often lack the financial reserves to absorb the additional costs. This could lead to a wave of retail bankruptcies, further straining the labor market and eroding consumer confidence. Slok advises investors to closely monitor weekly initial jobless claims reports, as these will be the first indicators of labor market weakness.

The complexity of trade negotiations, which involve reviewing each country's imported goods and negotiating tariffs for each product category, is a significant factor in the prolonged process. Negotiations also cover non-tariff barriers, tax differences, rules of origin, intellectual property, labor standards, environmental standards, anti-dumping measures, dispute resolution, digital trade, e-commerce, government procurement, and sometimes even security and defense considerations. The current global trade environment, marked by stagnation and supply chain challenges similar to those experienced during the COVID-19 pandemic, exacerbates these issues. This could lead to shortages in U.S. stores within a few weeks, rising inflation, and a decrease in tourism to the U.S.

Slok's research indicates that if current policies remain unchanged, the U.S. economy could face a "Voluntary Trade Reset Recession" (VTRR) with a 90% probability. To quantify the negative impact, he compares the current tariff increases to those during the 2018 trade friction period, when the average U.S. tariff rate rose from 2% to 3%, resulting in a 0.25% to 0.7% negative impact on GDP. Using these conservative estimates, the current tariff increase from 3% to 18% could result in a nearly 4% negative impact on GDP by 2025, not including additional non-linear effects from increased uncertainty in consumer spending decisions and business planning.

Slok emphasizes that small businesses, which account for over 80% of total U.S. employment and are the primary source of capital expenditure, will be the hardest hit. The sudden imposition of high tariffs will force these businesses to adjust immediately, many of which lack the operational funds to pay these tariffs. This could result in ships being stranded overseas, orders being canceled, and even well-run family retail businesses filing for bankruptcy. Any downturn in the retail sector will ultimately harm the labor market and consumer confidence.