Prolonged trade war could lead to a recession in the US, warns Goldman Sachs

Bloomberg Los Angeles | Updated on August 12, 2019

US-China trade war: Recession bound?   -  Getty Images/iStockphoto

Investors want politicians and central bankers act fast to change course.

Goldman Sachs Group Inc is raising concerns of a US recession as the trade war with China intensifies, boosting the impact on economic growth.

The US-based investment bank said that it no longer expects a trade deal before the 2020 presidential election, as threatened new tariffs take effect. It also lowered its fourth-quarter growth forecast by 0.2 percentage points to 1.8 per cent, and predicted that companies may lower spending and investments amid the uncertainty.

“Fears that the trade war will trigger a recession are growing,” Goldman Sachs said in a research note on Sunday from its US economists, adding, “we have increased our estimate of the growth impact of the trade war.”

Also read: China is saving stimulus for trade war winter as yuan weakens

After President Donald Trump issued a surprise threat to apply new tariffs on $300 billion of Chinese goods two weeks ago, Beijing responded on August 5 by halting purchases of US crops and allowing the yuan to fall to the weakest level since 2008. Trump’s administration fired back within hours, formally labelling China as a currency manipulator.

‘Foolish conflict’

Lawrence Summers, a former US Treasury secretary and a White House economic adviser during the last downturn, said last week that the escalating trade tensions are nudging the world economy toward its first recession in a decade, with investors demanding politicians and central bankers act fast to change course.

“In the US alone, the recession risk is much higher than it needs to be, and much higher than it was two months ago,” he told Bloomberg Television. “You can often play with fire and not have anything untoward happen, but if you do it too much you eventually get burned.”

On Sunday, Summers called the China fight a sadomasochistic and foolish trade conflict during an interview on CNN’s Fareed Zakaria GPS. Summers said that despite the risks, a crisis of the magnitude seen during the previous recession would be a great surprise.

Published on August 12, 2019

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