President Donald Trump’s tariff salvos have deeply rattled a stock market previously bullish about his supposedly pro-growth agenda. With recession fears mounting, a widely respected economist at Goldman Sachs has decided to downgrade the entire U.S. economy.

No longer looking toward share prices for signs of success and approval, the president and his economic officials have signaled they will look past short-term pain in their bid to reshape America’s finances. On Tuesday, Goldman chief economist Jan Hatzius revealed the storied investment bank forecasts U.S. GDP growth to come in below Wall Street’s consensus for the first time in 2½ years.

Goldman’s GDP projection for 2025 now sits at 1.7%, down from 2.4% at the start of the year. That’s because the firm now sees the average U.S. tariff rate rising by 10 basis points this year, twice Goldman’s previous forecast and about five times as high as the increase during Trump’s first term. Disappointing economic data over the past few weeks did not prompt the new projection, said Hatzius, who gained renown for his bearish forecasts prior to the onset of the great financial crisis in 2007.

“Instead, the reason for the downgrade is that our trade policy assumptions have become considerably more adverse, and the administration is managing expectations towards tariff-induced near-term economic weakness,” he wrote Tuesday in a note to clients.

Even though Trump has twice paused a 25% blanket tariff on Canada and Mexico, the on-again, off-again threats directed at America’s two biggest trading partners—the president said he would raise taxes on Canadian steel and aluminum to 50% on Tuesday—are just a sideshow to what’s to come, Hatzius said.

“We expect the next few months to bring a critical goods tariff, a global auto tariff, and a ‘reciprocal’ tariff,” he wrote.

That last category matters most, he said. Few countries have higher tariffs on the U.S. than vice versa, Hatzius noted, but the new administration has signaled it will treat Europe’s value-added tax , or VAT, as a tariff. It’s essentially Europe’s version of a sales tax, applied equally to foreign and domestic goods, though exemptions for exports have rattled American officials for decades.

How tariffs weigh on GDP

Investors have also been worried by several releases of soft economic data over the past few weeks. The Atlanta Fed’s GDPNow tracker currently signals a contraction for this quarter, projecting GDP growth of negative 2.4%, but Hatzius suggested reports of the volatile estimate have been greatly exaggerated.

“Lastly, there are important aspects of President Trump’s agenda—i.e., tax cuts and regulatory easing—that should support growth,” he wrote.

But those effects will, at least for now, be dominated by tariffs, he said, which weigh on growth through three main channels. Higher taxes on imports raise consumer prices, which cuts into purchasing power and tends to create tighter financial conditions. Finally, Hatzius noted, policy uncertainty leads firms to delay investment.

“All told, our new baseline implies that tariffs will subtract an estimated 0.8 [percentage points] from GDP growth over the next year, with only 0.1 to 0.2 [percentage points] of this drag offset by the (relatively slow-moving) boost from tax cuts and regulatory easing,” he wrote.

There are also worries tariffs will reignite inflation just as unemployment rises, a worst-case scenario reminiscent of the ruinous “ stagflation ” of the 1970s. Goldman now has the Federal Reserve’s preferred inflation metric reaccelerating to 3% this year, up 0.5 percentage points from the firm’s previous forecast. Goldman projects two rate cuts from the central bank this year, one behind the three reductions currently priced in by the market.

“In theory, a tariff hike raises the price level permanently but only raises the inflation rate temporarily,” Hatzius wrote. “In practice, this hinges on the assumption that inflation expectations remain well-anchored, which looks a bit more tenuous.”

For the first time in several years, investors have been much better off putting their money outside of the U.S. stock market in 2025. Nonetheless, Hatzius noted, traders in Europe and Asia still pay a risk premium 150 and 400 basis points higher than in the U.S., respectively. But he warned there could be plenty of turmoil to come.

“With U.S. growth now more likely to underperform relative to consensus expectations on both an absolute and relative basis,” he wrote, “and given the still-significant U.S. asset exposure in most global portfolios, the recent moves might well have further to go.”