US-China trade war takes heavier toll than expected, could wreak biggest havoc in fourth quarter, investment banks say

Uncertainty over future policy may lead to lower capital expenditures as businesses await a resolution of trade war, Goldman Sachs said

US economy faces rising fears of a recession, Goldman Sachs said, cutting fourth-quarter growth forecast for US by 0.2 percentage point to 1.8 per cent

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Fears of a recession caused by the trade war is growing, economists say. Photo: Bloomberg

Published: 12:00pm, 12 Aug 2019Updated: 8:31pm, 12 Aug 2019

The US-China trade war, which has raged on for the 13th month last week, will wreak havoc on the world’s two largest economies in the fourth quarter as it takes a heavier toll than previously expected on growth, according to two investment banks.

The United States economy faces rising fears of a recession, said Goldman Sachs, which cut its 2019 US growth forecast by 0.2 percentage point to 1.8 per cent in the final three months. China will feel the “biggest hit” from the latest round of proposed US tariffs on Chinese products in the fourth quarter, UBS said, downgrading its growth forecast for both 2019 and 2020.

“Fears that the trade war will trigger a recession are growing,” the team of Goldman economists led by Jan Hatzius and Alec Phillips said. “We expect tariffs targeting the remaining US$300 billion of US imports from China to go into effect and no longer expect a trade deal before the 2020 election.”

The reports by the two banks underscore how 13 months of a tit-for-tat dispute between the two economies had spilled over to the rest of the world. As businesses await the dispute’s resolution or escalation, investments are being deferred, and capital expenditures have been reduced, slowing the momentum for growth. Rising protectionism has increased the uncertainty over future trade policy, which may lead businesses to be more pessimistic and “invest, hire or produce less,” Goldman said.

The administration of US President Donald Trump has placed tariffs on more than half of Chinese-made products in the past year and threatened to add a 10 per cent tariff on another US$300 billion of Chinese imports in September. Beijing has responded with its own tariffs and retaliatory actions.

Trump has taken a hard line on tariffs as he tries to force China to change decades of industrial and trade policy. The US also labelled China a “currency manipulator” last week after Beijing allowed the yuan to slip below the psychologically important level of 7 yuan to the US dollar.

On Monday, UBS said that it expects the US$300 billion of tariffs to reduce China’s GDP growth by at least 30 basis points over the next 12 months. The investment bank also said that the negative effect of a US export ban on Huawei Technologies is expected to rise in the second half of this year and spill over into 2020.

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