“The good News is that we are still many steps away from a full blown global trade war,” Meyer wrote. “The bad news is that the tail risks are rising and our work and the literature suggest a major global trade confrontation would likely push the US and the rest of the world to the brink of a recession.”
To be sure, current data suggest that the trade situation would have to get extreme to send the economy into negative growth.
The Federal Reserve projects the economy to grow 2.8 percent for all of 2018, though it looks for GDP to slow to 2.4 percent in 2019 and 2 percent the year after before settling into a 1.8 percent longer-run rate. The Atlanta Fed is tracking second-quarter growth at 4.7 percent. Unemployment at 3.8 percent is also running at a generational low.
A baseline trade-war scenario would shave from GDP 0.3 to 0.4 percentage points in the first year then 0.5 to 0.6 percentage points in the second year — significant, but not recessionary, according to BofAML.
Still, the impact would slow much of the momentum the economy has seen during the Trump tenure.
The trade war scenario “suggests that the boost to growth expected from fiscal stimulus (e.g. tax cuts and greater federal government spending) will essentially be offset by the negative trade shock,” Meyer said.
In a more extreme scenario, though, an industrial production slowdown and an “uncertainty shock” could take hold and cause more damage.
“Combined with a tariff shock, we see a high probability that a major trade war would push the economy towards a full blown recession,” Meyer wrote.
BofAML is not the only firm worrying about more substantial impacts from what are now trade skirmishes.
Capital Economics said an uncertain future for the U.S. economy is being complicated by the back-and-forth battles.
“Trade tensions have escalated faster and further than we had originally anticipated,” Michael Pearce, the forecasting firm’s senior U.S. economist, said in a note. “We still think that protectionism alone is unlikely to kill the economic expansion. But it could worsen the slowdown we anticipate next year, and add to the domestic inflationary pressures that are already building.”
There are other issues at play, particularly when it comes to China.
Carried to the extreme, China would be unable to match the U.S. tit-for-tat as it exports much more than it imports in American goods. The nation then could seek a variety of other retaliatory measures, such as actions targeted at U.S. companies operating in China, currency devaluation or by dumping some of the $1.18 trillion in Treasurys it owns.
“With the China tariffs set to be introduced in two weeks’ time, we expect the trade rhetoric to remain intense,” Pearce said.
And the World Bank warned this month of the dire consequences of a trade war for the U.S. and global economies.
“A broad-based increase in tariffs worldwide would have major adverse consequences for global trade and activity,” the report said. “An escalation of tariffs up to legally-allowed bound rates could translate into a decline in global trade flows amounting to 9 percent, similar to the drop seen during the global financial crisis in 2008-09.”
Source : CNBC