Investors fail to notice the threat that the Trade War between the U.S- China possesses. The consequences could lead the global economy into recession, says Morgan Stanley.
“Investors are generally of the view that the trade dispute could drag on for longer, but they appear to be overlooking its potential impact on the global macro outlook,” said Chetan Ahya, the bank’s chief economist.
The U.S. President recently raised the tariffs on $200 billion worth of Chinese goods. The tariffs went from 10% to 25%. The American officials have also threatened to impose higher tariffs on the remaining $300 billion in leftover of the Chinese goods.
The chief economist said that the consequence of the Trade War at this moment is “highly undetermined” and added that if the U.S. continues with its 25% tariff increase on the remaining Chinese goods then a global recession in the next three quarters to likely to occur.
“Is such a prognosis alarmist? We think otherwise,” Ahya wrote.
In particular, investors are not fully appreciating the effect of reduced capital expenditures, which could drive down global demand, according to the bank.
An economic deceleration in 2020 can handicap Trump’s electoral chances. Trump has preached for the hike in growth and the lowering of unemployment, and his abilities to make deals was a key aspect of his campaign in 2016. American voters vote next year in November.
While policymakers are likely to act to stem the effects of a trade war, “given the customary lag before policy measures impact real economic activity, a downdraft in global growth appears inevitable,” according to Ahya.
Conversation between the two largest world powers has been stalled as the U.S. and China economies trade rhetorical barbs and punishing tit-for-tat economic measures.
Earlier on Sunday, the government of China released a white paper that accused America to initiate the Trade War and that America has been an unpredictable and distrustful negotiable partner. The publication warned that the dispute had global implications.
On Saturday, the Chinese Xinhua news agency reported that state authorities were investigating American delivery giant FedEx. That news followed the Trump administration barring Chinese telecom giant Huawei from dealing with American suppliers.
Markets have tanked amid the trade uncertainty, with the S&P 500 down more than 6% last month and the Dow, as of Friday, marking losses for six straight weeks, the longest such streak in eight years.
The hit to equities was compounded last week by Trump’s threat of new tariffs on Mexico if it does not take new action to curtail unlawful immigration into the U.S. Trump has said the U.S. will impose escalating tariffs on Mexican imports starting at 5% on June 10.
That threat, made via Twitter on Thursday evening, sent the important American indexes down more than 1% on Friday.
A lot depends on whether Trump and Chinese President Xi Jinping, or their representatives, are able to hash out a deal during the G-20 summit of world leaders in Japan later this month.
It is not yet clear if the two leaders will meet one-on-one. During a press conference Sunday, Chinese Vice Commerce Minister Wang Shouwen declined to confirm if a meeting will take place.