Are U.S. recession concerns rising with trade war?

Goldman Sachs Group Inc. is raising concerns of a U.S. recession as the trade war with China intensifies, boosting the impact on economic growth, Bloomberg reported citing a research note.

The U.S. investment bank said 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% to 1.8% 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 from its U.S. economists. "We have increased our estimate of the growth impact of the trade war," they added.

After U.S. 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 U.S. crops and allowing the yuan to fall to the weakest level since 2008. Trump’s administration fired back within hours, formally labeling China a currency manipulator.

The chairman of the Board of the National Currency Association (NCA), Dmitry Piskulov, speaking to Vestnik Kavkaza, noted in the first place that a trade war between the U.S. and China could lead to a decline in global economic activity. "The trade war between the United States and China is about reducing mutual trade. If the Americans impose duties, China's exports to the United States will decrease. In addition, the production of many American companies are based in China. Accordingly, all this can lead to a decrease in U.S. economic activity. and a decrease in global economic activity. The U.S. now has a slightly lower GDP than Chinese, but they nevertheless consume a lot of products, so there will be a decrease in U.S. economic growth as well," the expert said.

At the same time, he emphasized that, according to economists, the decline will be restrained, since the U.S. economy is quite large. “It can produce some goods itself, and replace some goods with goods from other countries. The opposite is that China introduces duties on the export of American agricultural products to its market. Accordingly, it can also hit American agricultural producers. It will also a certain contribution to the drop in U.S. GDP," the chairman of the Board of the National Currency Association (NCA) noted.

He also drew attention to the fact that U.S. duties would lead to a decrease in the activity of Chinese companies and a decrease in sales of products of Chinese companies in the United States, which in turn would reduce global demand for commodities and energy. “This may not be very useful for the Russian economy. Accordingly, this will mean a decrease in GDP growth, which will also indirectly affect the United States,” Dmitry Peskulov added.

In addition, he noted that all this could have a negative impact on the ruble exchange rate, a slowdown in world economic activity, as well as a decrease in demand from China for Russian products, commodity exports, oil, gas, and metals.

The professor at the department of the stock market and investments at the Higher School of Economics, Alexander Abramov, in turn, noted that the risk of U.S. recession is large enough today. "In the first half of the year there was an euphoria that the problem between China and the U.S. would quickly be solved. Now it is becoming more insoluble and is turning into a trade war. Most likely, there is no easy way out of trade contradictions between China and the U.S., they are only getting worse. Therefore, the recession forecast is serious enough, but it’s difficult to predict when it will happen - at the end of this year or at the beginning of next year. This is shown by not only Goldman Sachs calculations. Recent reports from the World Bank and the International Monetary Fund show that both China and the U.S. are slowing down because of this confrontation," he said.

“Many assets may drop, the price of gold will increase slightly. At the same time, it seems to me that there are no signs of a large, systemic crisis yet. Most likely, the recession will cause a decline in the price of a financial asset, a significant negative return, but it will not cause such serious financial shocks as bankruptcy of large financial institutions," the expert said.

He also pointed out that in the case of the U.S. recession, the ruble will weaken, because it is still heavily tied to foreign exchange earnings from exports. “At the same time, it should be borne in mind that Russia still has record gold and foreign exchange reserves. There are additional reserves in the budget and a more or less solid position of banks. Therefore, probably there will be no shock, but a recession will mean some explosive increase in the dollar exchange rate. Accordingly, welfare will worsen, economic growth will decline. If there is a global recession, Russia will also enter it," Alexander Abramov summed up.