Morgan Stanley’s chief economist, Chetan Ahya, predicts a global recession by 2020 if the trade war escalates, reports CCN.
In May, President Trump raised tariffs on Chinese imports from 10% to 25%, sending equities into a tailspin and causing global stock markets to lose $1 trillion on the next day of trading.
The U.S. has threatened to expand the 25% tariff to include $300 billion more Chinese goods.
Ahya warned of these potentially severe consequences in a research note on Sunday, saying it would put the world “in a recession in three quarters.”
“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.”
When speaking on Bloomberg Surveillance, Ahya elaborated on what that potential impact would be:
“We think you will probably in that scenario see a recession in the U.S., see a recession in global economy –– which is basically that the global economy will reach below 2.5% year on year growth by 2020.”
Equities are likely to be hit first by a trade war recession.
The stock market has already been hit with a record six week losing streak, which is the longest streak of week over week losses for the Dow in eight years.
Simply, the possibility of a trade war escalation has been enough to keep the stock market down.
As investors sell off stocks, they are also piling up global macro hedges. U.S. Treasury bonds and cryptocurrencies are currently bullish. This indicates that the trade war was a possible factor in the bitcoin price increase this spring, as institutional investors hedged their portfolios with “digital assets.”
In President Trump’s preparation to run for reelection in 2020, his closest advisors and political allies are paying attention to the fact that his reelection chances depend greatly on a strong U.S. economy.
If Chetan Ahya’s analysis is correct, and the White House levies tariffs on all Chinese imports, the following recession would provide Trump’s many Democratic challengers some good material to fight with in 2020.