Apollo Economist: 90% Recession Risk if Trade Policies Unchanged

Impact of Tariffs on Small Businesses

• ⚠️ Tariffs of significant magnitude on China are disproportionately impacting small businesses due to their limited working capital.
• 💡 Small businesses, which constitute 80% of total employment and capex, are struggling to afford the increased costs, potentially leading to widespread retail bankruptcies.
• 📌 Approximately 40% of imports from China go to small businesses, and another 40% are intermediate goods crucial for manufacturing.

Consumer Awareness and Economic Headwinds

• 📉 Consumers are largely unaware of the severity of the situation, while companies, especially small ones sourcing from China, are acutely aware.
• 🛒 Initial consumer front-loading of purchases before tariffs may mask the true economic impact, but a serious negative hit is expected as this effect fades.
• ✈️ Tourism is also negatively affected, with a significant drop in Canadian bookings into the US and reduced daily arrivals at major airports.

Federal Reserve's Dilemma

• ⚖️ The Federal Reserve faces a difficult situation with sideways interest rates, rising inflation, and slowing GDP, making policy decisions challenging.
• 📈 Tariffs are projected to increase inflation by approximately 1 percentage point over the next 12 months, complicating the Fed's mandate.
• 🚫 The Fed is currently unable to respond effectively to the complex economic environment, as stated by Jay Powell.

Recession Outlook and GDP Impact

• 📊 If current tariff levels persist, there is a 90% probability of a recession in 2025.
• 📉 A 15-fold increase in the average U.S. tariff rate (from 3% to 18%) could lower GDP by approximately four percentage points.
• ⚠️ This GDP reduction is compounded by other headwinds, including low corporate and consumer confidence, and a negative wealth effect from the stock market decline.