UBS sees 'a further slowing in U.S. economic growth' in second half of 2025

UBS forecasts a significant deceleration in U.S. economic growth to approximately 1% in 2025, attributing this to fiscal headwinds, persistent inflation, elevated interest rates, and a sharp increase in effective tariffs to 16%. The bank projects the unemployment rate will reach 4.6% and core PCE 3.4% by year-end 2025, noting rising consumer and corporate credit stress, with its recession indicator showing a 47% probability of a downturn through Q1 2026. In response, UBS is adopting a defensive credit posture, favoring higher quality and consumer non-cyclical assets.

Analysis

UBS projects a significant deceleration in U.S. economic growth to approximately 1% in 2025, driven by a confluence of fiscal drag, persistent inflation, and elevated interest rates. The firm forecasts the unemployment rate will rise to 4.6% by year-end 2025, citing softening private payrolls and a decline in service sector job listings as key headwinds. A primary inflationary driver identified is a substantial increase in the average effective tariff rate to roughly 16%, which is expected to push core PCE inflation to approximately 3.4% by the end of 2025. This is anticipated to further pressure real disposable income, which is already lagging personal consumption. While some fiscal stimulus is noted, its effects are not expected until the first half of 2026, creating a potential gap as tariff impacts are projected for the second half of 2025. Concurrently, signs of credit stress are emerging, with rising consumer delinquencies and a credit-based recession indicator showing a 47% probability of a downturn through the first quarter of 2026, prompting UBS to adopt a defensive credit posture favoring quality and non-cyclical assets.

Key Decisions for Investors

• Given the forecast for economic deceleration and rising credit stress, consider adopting a more defensive portfolio posture by increasing allocations to higher-quality credit and consumer non-cyclical equities.
• Monitor key indicators highlighted by the analysis, particularly private payroll figures, consumer delinquency rates, and core PCE inflation, for early signs of confirmation or deviation from the projected slowdown.
• Evaluate exposure to cyclical sectors and companies sensitive to consumer discretionary spending, as these are most at-risk from the expected squeeze on real disposable income and the impact of tariffs.
• Be mindful of the market timing risk in the latter half of 2025, as negative tariff impacts are forecast to precede any potential offsetting fiscal stimulus in 2026.