Morgan Stanley Predicts Global Recession ‘In Three Quarters’ If Trump Escalates Trade War

Morgan Stanley warns the U.S.-China trade war will trigger a global recession three quarters from now if Trump does implement his threatened 25% tariffs on additional Chinese imports over the next few months.

The financial services company also cautioned investors not to place too much hope on a trade deal diffusing this crisis any time soon, and warned them against the tendency to gloss over the threat Trump’s trade war poses to global economic growth.

“Investors are generally 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,” wrote Chetan Ahya, Morgan Stanley’s chief economist, in a note Sunday.

On May 17, Trump boosted tariffs on $200 billion worth of Chinese goods to 25% from 10%. He also keeps threatening to slap tariffs on the $300 billion in Chinese imports untouched by tariffs.

In his note to investors, Ahya said the outcome of the trade war right now “is highly uncertain.” He did warn that if Trump follows through with 25% tariffs on the additional Chinese imports, “we could end up in a recession in three quarters.”

“Is such a prognosis alarmist? We think otherwise,” wrote Ahya.

He remains puzzled why investors seem to not fully comprehend the effect of reduced capital expenditures that stand to depress global demand.

Talks between the U.S. and China to end the trade war have gotten nowhere on stubborn U.S. demands for structural changes to China’s economy, which Beijing contends violates its sovereignty and are thus unacceptable.

China's laundry list of complaints was aired in an 8,300-page White Paper released Sunday that also laid the blame for the trade war entirely on the shoulders of Trump and his administration.

Trump administration optimists still place great store in Trump and Chinese president Xi Jinping talking to each other at the upcoming G-20 summit of world leaders in Japan later this month. China has, thus far, refused to confirm if this meeting will take place at all.

This latest recession warning is the second from Morgan Stanley in less than a week. On May 28, the firm said Trump’s trade war is putting U.S. corporate profits and economic growth at risk. It also said the fortunes of Wall Street and the economic outlook for the United States as a whole is “deteriorating.”

“Recent data points suggest U.S. earnings and economic risk is greater than most investors may think,” wrote chief U.S. equity strategist Michael Wilson.

Morgan Stanley said a slowdown in both the manufacturing and services sector plus with the inverted curve for the benchmark 10-year Treasury yield means the U.S. is now on a “recession watch.”