Mild GDP slowdown predicted for second half of 2025

A mild slowdown in economic growth, a pullback in consumer spending and uncertainty over the impact of tariffs will impact the U.S. economy in the second half of 2025. That’s according to an economist at Morningstar, who gave an outlook for the second half of the year during a recent webinar.

“We are expecting a mild slowdown in GDP growth over the next two years – about a percentage point and a half slower over the next two years,” said Preston Caldwell, chief U.S. economist with Morningstar Investment Management.

Tariffs are partly to blame for the mild slowdown in gross domestic product growth, he said. “But we actually expected some sort of a slowdown before the tariff surge in April and that’s principally because it looked as though consumers were getting overstretched, with the household savings rate below the pre-pandemic level, so we had been expecting consumers to pull back, which we had been seeing in recent months’ data.”

However, he said he expects GDP growth to reaccelerate from 2027 to 2029, as some of the impact of tariffs fades while the Federal Reserve implements a slightly looser monetary policy.

As far as inflation goes, Caldwell said the U.S. was close to returning to the Fed’s target of 2% annual inflation, “but I do think tariffs will ultimately cause prices to shift upward with the inflation impact peaking in 2026.”

However, he predicted that the deceleration in GDP growth will create some slack in the economy that will push inflation back down.

GDP slowdown doesn’t equal selloff

Looking at the stock market, Caldwell said a mild GDP slowdown doesn’t have to translate into a big market selloff.

“Historically, we’ve had very large sell-offs in environments where the economy is not weakened very much - the 2001 recession, for example – but we’ve also had vice versa where we’ve had a textbook recession and markets don’t sell off that much,” he said.

However, Caldwell said he believes “consumers are reaching a breaking point” after spending at a high rate for so long. He expects the Fed to cut interest rates – 200 basis points in the short-term interest rate – over the next 2 ½ years.

“Rates could go higher before they go lower, but they have to go lower, and one reason is housing,” he said. “I think homebuyers are losing patience with the story that they can continue to buy homes at extremely high mortgage rates and refinance a few years down the road.

“I think at some point rates do have to fall.”