What is a recession? Economists warn Trump tariffs could tip US into one in 2025

JP Morgan raised its probability of a US and global recession to 60%, up from 40% last month, citing the growing tariff-related stress on markets and investor confidence. Other major financial institutions also revised their forecasts. S&P Global increased its estimated chance of a US recession to 30-35%, up from 25%, while Goldman Sachs earlier lifted its estimate to 35%, from 20%, noting weakening economic fundamentals.

According to a Bloomberg report, HSBC echoed the concerns, saying the recession narrative is gaining momentum, though it believes much of this risk is already “priced in”. Its equity market indicator currently reflects a 40% chance of a recession by year-end.

Other institutions – including Barclays, BofA Global Research, Deutsche Bank, RBC Capital Markets, and UBS Global Wealth Management – also warned of rising recession risks if the tariffs remain in place.

The Trump administration’s latest round of tariffs – the most extensive so far – now targets a wide range of imports, excluding goods from Mexico and Canada. The White House invoked emergency economic powers to justify the move, arguing the US suffers from trade imbalances due to a lack of reciprocity and high foreign taxes.

Starting April 9, around 60 countries – including the EU, Japan, and China – will face even higher, country-specific tariffs. In response, China announced its own 34% tariffs on US goods from April 10 and said it would file a complaint at the World Trade Organization (WTO) and restrict exports of rare earth elements, critical to high-tech industries.

While China took immediate retaliatory steps, other global trading partners are adopting a wait-and-watch approach amid growing concerns about a slowdown in the global economy.

What is a recession?

In the US, the National Bureau of Economic Research (NBER) – a private organisation responsible for determining the official start and end dates of recessions – uses a broad approach to define a recession. According to its Business Cycle Dating Committee, a recession is marked by a significant decline in economic activity that is widespread, lasts more than a few months, and is usually evident in areas such as production, employment, real income, and other key indicators.

The committee identifies a recession as beginning when economic activity peaks and ending when it hits a low point or trough. In making its assessment, the NBER considers a wide range of data beyond GDP, including employment, income, sales, and industrial output.

The International Monetary Fund (IMF) states that there is no single official definition of a recession, though it is commonly understood as a period of declining economic activity. Brief downturns typically do not qualify, the IMF says.

A widely used rule of thumb among analysts is two consecutive quarters of decline in real (inflation-adjusted) GDP, which represents the total value of goods and services produced in a country. While this GDP-based approach is practical, the IMF notes it has limitations, as it doesn’t capture the full picture of economic conditions. A broader set of indicators often provides a more accurate and timely understanding of whether an economy is truly in recession.

What causes a recession?

According to the IMF, understanding the causes of recessions has long been a central focus of economic research. Recessions can result from a variety of factors.

• One common cause is a sudden spike in the prices of key production inputs, such as oil. When energy costs rise sharply, they push up overall prices, reduce consumer purchasing power, and lead to a drop in aggregate demand.
• Recessions may also occur when a country implements contractionary monetary or fiscal policies to control inflation. If these measures are too aggressive, they can suppress demand for goods and services, triggering an economic slowdown.
• Financial market instability is another major cause, as seen during the 2007 global financial crisis. Rapid surges in asset prices and credit expansion can lead to unsustainable debt levels.
• When households and businesses become over-leveraged and struggle to repay debt, they scale back on spending and investment, reducing economic activity.
• While not all credit booms end in recessions, those that do often lead to deeper and more prolonged downturns. Additionally, recessions can result from declining external demand, especially in export-dependent economies.
• Economic slowdowns in major countries like the United States, Germany, or Japan can quickly impact their trading partners, particularly during globally synchronised recessions.