A trade war would produce a significant reduction in US economic growth and could produce a recession, according to an analysis by Bank of America Merrill Lynch.
The report predicted that a trade war could shave up to 0.4 percentage point off gross domestic product growth in the first year and as much as 0.6 in the second. On top of that, it said, a “decline in confidence and supply chain disruptions could amplify the trade shock, leading to an outright recession.”
In another report, the firm contended that a 10% increase in import costs from trade tariffs would reduce the S&P 500’s per-share earnings by 3% to 4%.
President Donald Trump has announced the imposition of 10% tariffs on $200 billion in Chinese imports, along with smaller duty increases on other goods. He has said, “Trade wars are good and easy to win.”
By BofA Merrill’s estimate, the trade shock would offset the positive push of the tax cuts that went into effect this year. By the second year of the trade war, the firm maintained, the Federal Reserve would be forced to rein in its campaign to hike short-term interest rates.
That would leave the benchmark federal funds rate 0.5 to .075 point lower than it otherwise would be, settling at around 2.5% to 2.75%. It now is around 1.9%.
Previous tariff actions by the administration have had a very small effect on economic growth, the report said. The next round, of $200 billion, would have a harsher impact, it concluded. Worst case: “A major global confrontation would likely lead the US and the rest of the world to the brink of recession.”