Bettors Predict 2025 Q1 US Economic Contraction Amid Tariff Tensions

Bettors on prediction platforms have turned bearish on the US economy, predicting an economic contraction during the first quarter of 2025. This shift marks a significant change in sentiment, as both platforms had previously anticipated positive growth. On April 29, consensus Q1 US growth estimates on one platform plunged from around 0.5% to -0.4% in less than 24 hours, while another platform's bettors set the odds of a US economic contraction in Q1 at around 70%.

This pessimistic outlook comes amidst escalating tariff tensions, with the US President announcing plans to place sweeping tariffs on US imports. The prospect of a global trade war has already weighed on US economic data, with the Philadelphia Federal Reserve Manufacturing Index reporting sharp declines in activity. Analysts attribute this to factories bracing for the impact of the tariff plans, which could raise production costs for manufacturers.

The markets are closely watching the outcome of an upcoming report by the US Bureau of Economic Analysis, which will provide official measures of America’s gross domestic product (GDP). This report will offer insights into the impact of the controversial trade policies on the US economy. Prediction markets, which allow users to trade contracts tied to specific events, have proven reliable in forecasting outcomes, including the recent election results.

The negative outlook on Q1 GDP growth is further supported by the Federal Reserve Bank of Atlanta's forecast, which predicts a sharp decline of 2.5% for the quarter. This would mark the worst quarterly performance since mid-2020, highlighting the ongoing risks and uncertainties that investors and businesses face. The widening trade deficit in March has also raised concerns about the potential drag on economic growth, as tariffs and trade disputes continue to disrupt global supply chains and impact consumer spending.

The tariff turmoil has led to increased bets against US equities by hedge funds, with equity long-short managers underweighting US stocks and adding to their short positions. This shift in sentiment reflects growing concerns about the potential impact of tariffs on corporate earnings and economic growth. As the market narrative continues to flip-flop between recession and stagflation, investors are advised to adopt a defensive strategy to mitigate the risks associated with the ongoing trade disputes.

The recent upticks in the market may disguise the ongoing risks that remain for investors, as the economic outlook remains uncertain. The Federal Reserve's monetary policy, inflationary pressures, and the resolution of tariff disputes will all play a crucial role in determining the trajectory of the US economy in the coming months. As such, investors should remain vigilant and prepared for potential market volatility, as the economic landscape continues to evolve.