Morgan Stanley has a word of caution about the American economy.
In large part this is due to Trump’s aggressive pursuit of trade wars, which he famously said were easy to win. Trump’s advisers cautioned against his aggressive tariff policies and the fallout has wracked cornerstones of the American economy like agriculture and the automotive industry.
A new report by financial institution Morgan Stanley warned of the potential disastrous results from a breakdown in the current U.S.-China trade talks.
“If talks stall, no deal is agreed upon and the U.S. imposes 25% tariffs on the remaining circa $300 billion of imports from China, we see the global economy heading towards recession,” reads the bank’s analysis.
Morgan Stanley projects that by spring of 2020, the Federal Reserve will respond to the current trajectory of trade relations with China by dropping interest rates to near-zero as it had following the 2008 recession. The post-2008 era of near-zero interest rates only just ended in 2018. Zero interest could become the new normal, as it has in Japan.
Trump’s pick to head the Fed might actually make the situation worse, according to Forbes.
China would respond by ramping up its economic stimulus programs by around $500 billion. However, both these policies take time to impact the health of global financial systems.
“A reactive policy response and the usual lags of policy transmission would mean that we might not be able to avert the tightening of financial conditions and a full-blown global recession,” read Morgan Stanley’s report.
The bank also worried that investors are not correctly reading the global financial landscape. In simple terms, Morgan Stanley cautioned that trade wars could lead to more roadblocks than just tariffs such as purchase restrictions, and that a sharp realization of that risk itself shakes investor confidence.
Economies operate largely based on the confidence of investors, businesses, consumers and voters. Disruption of that confidence can have all the tangible impact of more concrete disasters. The worry corroding investor confidence has already thrown red flags that a recession is imminent.
And trade tension is ramping up, not down. Recent moves toward a new North American trade deal frees the Trump Administration up to pursue more aggressive trade relations with China in spite of warnings.
“Our base case is that the escalation is temporary, but we would readily admit that the uncertainty is high with regard to how trade talks could evolve,” the report reads. “The impact on global growth is non-linear – the risks are firmly skewed to the downside and the window for resolution is narrowing.”
Even continuing at current levels of tariffs between the nations would, according to the bank, slow global economic growth to perilously close to the statistical marker of a recession. And Americans are ill-prepared for another recession.
“There are more people on the margins than there were in 2008,” said Mehrsa Baradaran, an associate dean at the University of Georgia School of Law. “More people have been knocked out of the secure middle class. I think the next crisis will hurt as much if not more.”
This isn’t the first time Trump would be taking actions as the nation’s chief businessman that financial institutions warned against. Goldman Sachs warned that Trump’s tax policy would fuel recession. Trump’s failed attempt to coerce border wall funding with a shutdown also placed strain on the economy.
Katelyn Kivel is a contributing editor and senior legal reporter for Grit Post in Kalamazoo, Michigan. Follow her on Twitter @KatelynKivel.