Morgan Stanley: If trade war escalates, a recession will be here in 3 quarters

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If the U.S. continues to raise a blanket of tariffs on Chinese goods in the coming months, and China responds, Morgan Stanley said on Monday that “we would see the global economy entering recession in three quarters.”

“As we view the risk of further escalation as high, the risks to the global outlook are decidedly skewed to the downside,” Morgan Stanley chief economist Chetan Ahya told investors.

The firm believes a global recession will come if the trade war further escalates through the U.S. raising tariffs to 25% “on all imports from China for 4-6 months,” Ahya said,.

President Donald Trump on Thursday unexpectedly announced that, beginning Sept. 1, the U.S. will add levies of 10% on $300 billion in Chinese goods. The move would mean that all Chinese goods imported to the U.S. are penalized. These new tariffs “raise downside risks significantly,” Ahya said.

“About two-thirds of goods tariffed in this round are consumer goods, which could lead to a more pronounced impact on the US as compared to earlier tranches,” Ahya said. “Trade tensions have pushed corporate confidence and global growth to multi-year lows.”

The Chinese yuan has already weakened below a key level, which Reuters reported came after the Chinese central bank set the midpoint of the yuan’s price against the dollar at its weakest level since December 2018. Some analysts attributed the currency’s weakening as retaliation by China, although the country’s central bank denied that it made the move as an intentional response.

“Global central banks, in particular the Fed and ECB, will provide additional monetary policy support,” Ahya said. “But these measures, while helpful in containing downside risks, will not be enough to drive a recovery until trade policy uncertainty dissipates.”

– CNBC’s Michael Bloom contributed to this report.

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