Goldman darkens view of trade war fallout
Goldman Sachs now expects the brewing trade war to have a bigger impact on the US economy than it previously forecast, saying fears that the dispute will cause a recession are growing.
The bank lowered its forecast for economic growth in the fourth quarter to 1.8 per cent quarter-over-quarter, down from 2 per cent, noting potential fallout across financial conditions, business investment and supply chains.
In a note to clients, chief economist Jan Hatzius said Goldman no longer believes a trade deal will materialise before the 2020 presidential election in the US.
“In our baseline policy scenario, we now estimate a peak cumulative drag on the level of GDP of 0.6%, including a 0.2% drag from the latest escalation,” he wrote. “The drivers of this modest change are that we now include an estimate of the sentiment and uncertainty effects and that financial markets have responded notably to recent trade news.”
Mr Hatzius said Goldman had previously estimated “manageable growth impacts of the trade war” for the US, “with the impact of lower real income somewhat offset by a shift in demand toward domestically-produced goods”.
Investors’ hopes for a trade truce took a hit early this month when President Donald Trump announced plans to impose a 10 per cent tariff on another $300bn in Chinese goods beginning in September. Days later, China allowed its currency to fall through a key threshold in a move seen as retaliation.
The latest escalation in the US-China trade row sparked a bout of volatility in global markets. US stocks suffered their worst day of 2019 last Monday, while Treasury yields have tumbled to fresh 2016 lows amid global growth worries and expectations that trade headwinds will convince the Federal Reserve to cut interest rates further.
Mr Hatzius said Goldman expects the new tariffs to go into effect, which would sharply increase the aggregate effective US tariff rate. The risk of further escalation has increased, he added, citing Mr Trump’s threat to bring tariffs “well beyond 25 per cent”.
Goldman looked at the impact of the September tariffs on its financial conditions index, predicting a drag on GDP based on the reaction to prior trade levies. “This GDP hit from financial conditions would be larger without the monetary policy offset markets are pricing,” the bank said.
Goldman’s updated forecast also includes estimates for trade-related impacts to business investments, with increased pessimism and policy uncertainty potentially leading companies to slash spending, production or hiring.
“Capex in industries with high sales in China may decrease due to trade policy uncertainty if firms are concerned about retaliatory tariffs from China,” Mr Hatzius said. Looking at 10 industries with the highest sales exposure to China, Goldman sees evidence of lower capex as trade tensions began to escalate.