Trade war escalation could smash global economy and equities: UBS
Global share markets plummeting more than 20 per cent, economies shrinking and inflation re-ignited is the gloomy prognosis for a trade war from giant investment bank UBS.
- A full trade could see global equities tumble by more than 20pc and global GDP tumble according to UBS
- The escalation to a full-out war with a blanket 30pc tariff on Chinese imports plus retaliation could start as early as October
- Key protagonists US and China likely to be the biggest losers
While the current situation is bad, the fully-blown “trade war” scenario — where the US imposes all the actions it has so far threatened and China retaliates as expected — things would become decidedly ugly.
Global GDP growth would fall by 1 percentage point and inflation would rise by 0.3 percentage points.
The biggest losers would be the key protagonists — the US and China — with GDP falling with a thud, down 2.5 and 2.3 percentage points respectively.
The US and China would also be hit with higher-than-average inflation spikes.
“That the negative impact on US growth is larger than any other country may be counterintuitive, but it is a function of fighting on many different trade fronts and a large drag coming from much lower oil prices,” UBS said.
While higher prices caused by the import taxes are the most immediate effect, accounting for roughly half the decline in GDP, the larger impact will come from derailing the existing global supply chain of goods hit by the tariffs and the impact on jobs and confidence.
“The negative income effect from weaker export growth would lower corporate profits and wages, and weigh on household consumption and fixed investment,” UBS argued.
The global trade war scenario assumes an escalation from the immediate threat of the US placing a 10 per cent tariff on $200 billion worth of Chinese imports to a 30 per cent tariff on virtually every Chinese product landed in the US, as well as a response from China.
That would only happen after the current threats become law sometime before September, an event UBS believes is all but inevitable.
Once China retaliates as expected — even if not proportionately — a further, much bigger, response from the US is expected to be swift.
Trade War Timeline
|July 11||US announces 10pc tariff on additional $US200b of imports||Already happened. Implementation likely before October|
|July 20||Additional $US16b in goods identified by US and China for 25pc tariff||Yes, targets identified, consultation complete, expect announcement within 2 weeks|
|September||US to implement 10pc on $US200 of imports||Yes, as negotiations on Chinese intellectual property practices won’t be resolved.|
|September||China retaliates||Yes (partially) but imports from the US are too small for an exactly proportional response|
|October||US to decide whether to respond to China’s partial retaliation||Unclear. There is a narrow path for de-escalation, otherwise a full out trade war with 30pc tariffs likely|
|End of the year||US announces global car tariffs||Yes, but with carve outs.|
On UBS’s modelling, the 10 per cent tariff would see the key US equities benchmark, the S&P500, fall 10 per cent.
The full-blown trade war would more than double that decline, plunging US equities deep into bear territory as average earnings fall by around 15 per cent.
Asian equities would fall by 24 per cent and Europe by 25 per cent.
The only positive news for Australian investors is the ASX would marginally outperform the rest of the world in the carnage, but still fall by almost 20 per cent.
US hardest hit
There are plenty of other consequences too.
Global interest rates would fall, US 10-year bonds would drop around 50 basis points and the expected hikes from the US Federal Reserve next year would be taken off the table.
Lower growth would also translate to demand for oil falling by around 500,000 barrels per day and prices tumbling back under $US60 a barrel.
While mutually assured pain is inevitable, the US may suffer the most in the case of an all out trade war.
“Relative to the US, China should have fewer issues finding substitutes for mostly agricultural/vehicle imports,” UBS argued.
Particularly problematic, given parts of the US manufacturing base have been hollowed out, in many instances the US has no substitute for imports and the disruption of industrial production will spread.
“With that fall in production, job losses and fear of job losses further depress consumption spending,” UBS hypothesised.