Among the many hair-raising projections is the prospect of the S&P 500 entering a correction by losing 10% of its value, which would almost certainly trigger a long-feared recession. That particular forecast was made by UBS analyst Keith Parker, according to CNBC. Parker specified that key European and American cyclical markets would bear the brunt of the declines.
“FASTEN YOUR SEATBELT AND DON’T HOLD YOUR BREATH”
There is an old saying that when two elephants fight, it is the grass that suffers. In this case, both elephants will also sustain a significant amount of damage if Parker’s projections hold true. He predicts that a full-scale trade conflict between the world’s two biggest economies will see China shed anything from 1.2% to 1.5% of its GDP, which is equivalent to a drop of between $132 billion and $165 billion.
If China responds to Donald Trump’s threatened 25% tariff with a tariff increment of its own from 7% to 15% on approximately $60 billion worth of American imports, this could see the U.S. shed 0.1% of its GDP, or about $14 billion. In the ensuing scenario, Bank of America projects that China may hike tariffs on U.S.-made vehicles and reduce its soybean imports from the U.S. Meanwhile, Chinese imports of American soybeans have already fallen off a cliffsince 2017, dropping roughly 98% last year as China looks toward less antagonistic partners like Brazil.
According to a Bank of America report also cited by CNBC:
“Fasten your seatbelt and don’t hold your breath. The latest escalation of the trade war was completely unexpected, despite the strength of the economy and the markets. This is evident from the immediate negative reaction of U.S. equity futures to the news.”
As the two elephants knock heads, the amount they are erasing from each other’s economies is equivalent to the GDP of mid-sized nations. European and Asian economies will also feel some pain, according to UBS.
IS TRUMP BLUFFING?
According to the White House, the new 25% tariff regime that could potentially kick off this entire sequence of events will come into effect just after midnight on Friday. Expectedly, markets have been in virtual freefall since Monday, with the NASDAQ and S&P 500 both shedding close to 1% on Monday alone. The miserable market conditions continued through Tuesday, with little sign of respite as investors react with horror at the thought of a damaging 20th-century-style trade conflict between economic superpowers.
Whether this is a considered masterstroke of strategy or simply a typical Trump action, it certainly appears to have done the trick. Chinese Vice Vice Premier Liu He will be part of a trade delegation to the U.S. later in the week, which at the very least is a sign that China is willing to give ground so as to avoid a damaging trade war.