Good times can’t last forever – and the fear of a recession seems to be growing stronger by the day, with both Morgan Stanley and Goldman Sachs saying this week that the worst yet to come with a global trade war that is spiraling out of control.
A recent public survey by the National Association for Business Economics puts recession fears into even sharper relief. The Q2 survey of 53 economists has 60 percent of respondents fearful that there is a risk of recession by 2020, while 15 percent said that a recession will begin this year, and some 33 percent predicted a recession mid-way through next year.
More specifically, 56 percent cited increasingly protectionist trade policy as the most significant risk to the U.S. economy.
A slowdown in factory activity last month across the U.S., Europe and Asia is perhaps the first sign of a global recession amid a trade war between the U.S. and China, Trump’s new tariff threat against Mexico, and the Brexit drama. And to top this off, there isn’t exactly a high level of enthusiasm for the upcoming G20 summit in Japan - a venue in which Washington and Beijing would hope to reduce trade tensions.
If they fail, the world’s central bankers will adjust their monetary policy to support a deteriorating economy, and thus the vicious circle begins.
The World Economic Forum, which hosts the high-profile power leaders and countries at Davos, in an annual Global Risk Report for 2018, said it feared that the next recession could be even worse than 2008 - and the trade war has grown out of control since that report was released.
“Central banks were crucial to restoring economic confidence among households, businesses and markets after the crisis. Repeating that feat could be a struggle without interest rates at their disposal. And without a floor placed under confidence, the risk of the next downturn being much deeper and longer than might otherwise be the case would increase,” the WEF wrote.
Increasingly, experts and finance giants are sounding the alarm bells over a trade war that could be the trigger for a global recession.
According to Chetan Ahya, Morgan Stanley’s chief economist and global head of economics, “If talks stall, no deal is agreed upon and the U.S. imposes 25% tariffs on the remaining $300 billion of imports from China, we see the global economy heading towards recession.”
Echoing this sentiment, JPMorgan puts a 40-percent chance on a recession in the second half of this year. Last month it predicted only a 25-percent chance.
Nor is Goldman Sachs being quiet about it, lowering its second-half growth forecast by 0.5 percentage points to 2 percent, while cutting Q2 GDP growth forecast to 1.1 percent, down from 1.3 percent just 10 days ago, citing the “scale and scope of the trade war”.
Corporate profit forecasts are also taking a hit. On Monday, both Bank of America and Citigroup lowered their U.S. corporate profit forecasts, citing the risk of recession due to escalating trade tensions Bloomberg reported. BofA cut its 2019 estimate for S&P 500 companies by $2 a share to take the costs of tariffs into account, and Citi’s chief equity strategist followed suit.
By Josh Owens of Safehaven.com