Key takeaways
- J.P. Morgan Research has reduced the probability of a U.S. and global recession occurring in 2025 from 60% to 40%.
- However, a period of sub-par growth could lie ahead, especially as the U.S. tariff shock could still be material.
- The Fed is not expected to start easing until December, with three sequential cuts thereafter, reaching a policy rate of 3.25–3.5% by the second quarter of 2026.
Trade tensions have abated in recent days, with the Trump administration walking back some of its more aggressive tariff policies. Investors have reacted with optimism, and markets have rebounded as a result. In light of these developments, is a recession still in the cards?
“We no longer see a U.S. recession, but expect material headwinds to keep growth weak through the rest of this year.”
Joseph Lupton
Global economist, J.P. Morgan
Why has the probability of a recession fallen so significantly?
The détente between the U.S. and China points to a reduced U.S. tariff tax hike and a smaller slide in global sentiment. Consequently, the U.S. economy is expected to skirt a recession, although the drag on second-half growth could still be significant.
“The recent backtrack on U.S.–China tariffs has altered our thinking in two important ways. First, the size of the tariff tax hike has been scaled down, imparting less of a purchasing power squeeze. Second, the quick unilateral tariff reversal by President Trump is signaling less tolerance for ‘short-term pain, long-term gain,’” said Joseph Lupton, a global economist at J.P. Morgan. “As a result, we no longer see a U.S. recession, but expect material headwinds to keep growth weak through the rest of this year.”
However, future developments in U.S. policy could generate additional surprises. Negotiations with trading partners will likely be carried out in the coming weeks, with varying results. At the same time, the U.S. now looks set to take an easier fiscal policy stance than previously expected for the 2026 financial year. “On balance, we still see considerable downside risk, with a 40% probability of a U.S. and global recession,” Lupton said.
Global outlook scenarios
J.P. Morgan now sees a 40% probability that the U.S./global economy will enter a recession by the end of 2025.
What does this mean for growth?
While recession risks have faded, a period of sub-par growth could lie ahead for both the U.S. and global economies, especially as the U.S. tariff shock could still be material.
“Assuming a 39% tax on China and a 10% tax elsewhere, along with sector tariffs, we now estimate an effective ex-ante tariff rate of 13.4%. This is akin to an ex-ante $430 billion tax hike on U.S. households and businesses, worth 1.4% of GDP,” Lupton noted. This tax burden is compounded by baseline projections of slowing growth, fading fiscal and immigration support, as well as the sentiment shock to date. Overall, J.P. Morgan Research expects U.S. GDP to expand by just a 0.25% annualized rate (ar) in the second half of 2025.
Sluggish growth will likely be seen elsewhere, too. J.P. Morgan Research has upgraded its GDP forecasts for China from 1.3%ar to 3%ar, which is still below par. Similarly, global growth is projected to weigh in at 1.3%ar — nearly a full percentage point below potential.
What is the outlook for interest rates?
Against this rapidly evolving backdrop, J.P. Morgan Research expects the Fed to hold policy rates steady over the medium term, with the next rate cut not likely until December.
“Our updated labor market outlook is less demanding of immediate action to stem employment risks. For the Fed, we are pushing back the timing of the resumption of rate cuts from September to December,” said Michael Feroli, chief U.S. economist at J.P. Morgan. “After December, we see a further three sequential cuts, taking the funds rate target range to 3.25–3.5% by the second quarter of 2026.”
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