First-quarter GDP growth will be just 0.3% as tariffs stoke stagflation conditions, says CNBC survey

The U.S. economy is projected to experience a stark slowdown in the first quarter of 2025, with the Gross Domestic Product (GDP) growth estimated at just 0.3%, according to CNBC’s Rapid Update survey that combined the forecasts of 14 economists. This figure is significantly lower than the 2.3% growth observed in the fourth quarter of 2024 and would mark the weakest growth since 2022 when the economy was recovering from the pandemic.

Meanwhile, the Core Personal Consumption Expenditures (PCE) inflation, a favored inflation barometer by the Federal Reserve, is predicted to hover around 2.9% for most of the year, resuming its drop in the fourth quarter.

These bleak predictions are being attributed to declining consumer and business sentiment provoked by the nascent trade war and are beginning to reflect in tangible economic activity. The Commerce Department reported that real, inflation-adjusted consumer spending in February rose by a mere 0.1%, following a -0.6% decrease in January. Consequently, Action Economics has downgraded its forecast for spending growth to 0.2% this quarter from 4% in the previous quarter.

The new, sweeping tariffs introduced by the Trump administration and the uncertainty surrounding its policies are fostering a stagflationary climate. Stagflation is characterized by stagnant economic growth, high unemployment, and high inflation.

An import surge, likely driven by efforts to avoid impending tariffs, is also contributing to the economic slowdown as imports reduce GDP.

However, this import effect is expected to wane, and only two of the 12 surveyed economists predict negative growth in Q1. None of them anticipate consecutive quarters of economic contraction. Oxford Economics, despite having the lowest Q1 estimate at -1.6%, forecasts a second-quarter GDP rebound to 1.9%.

On average, economists predict a gradual recovery, with GDP averages of 1.4%, 1.6%, and 2% for the second, third, and fourth quarters, respectively.

However, there are concerns that an economy with paltry growth of 0.3% could easily transition into negative growth, especially with new tariffs on the horizon.

Mark Zandi from Moody's Analytics warns, "And a recession will be likely if the president doesn’t begin backtracking on the tariffs by the third quarter."

Persistent inflation could hamper the Fed's ability to combat faltering growth. Despite market expectations of rate cuts, the Fed may find it challenging to rationalize until inflation begins to decline more convincingly towards the year's end.