LOS ANGELES • Goldman Sachs Group is raising concerns of a US recession as the trade war with China intensifies, boosting the impact on economic growth.
The US investment bank said it no longer expects a trade deal before the presidential election next year as threatened new tariffs take effect. It also lowered its fourth-quarter growth forecast by 0.2 percentage points to 1.8 per cent 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 on Sunday from its US economists, adding that "we have increased our estimate of the growth impact of the trade war".
After US President Donald Trump issued a surprise threat to apply new tariffs on US$300 billion (S$417 billion) of Chinese goods two weeks ago, Beijing responded on Aug 5 by halting purchases of US crops and allowing the yuan to fall to the weakest level since 2008.
Mr Trump's administration fired back within hours, formally labelling China a currency manipulator.
Dr Lawrence Summers, a former US Treasury secretary and a White House economic adviser during the last downturn, said last week the escalating trade tensions are nudging the world economy towards its first recession in a decade, with investors demanding politicians and central bankers act fast to change course.
In the US alone, the recession risk is "much higher than it needs to be and much higher than it was two months ago", he told Bloomberg Television. "You can often play with fire and not have anything untoward happen, but if you do it too much, you'd eventually get burned."
On Sunday, Dr Summers called the China fight a "sadomasochistic and foolish trade conflict" during an interview on CNN's Fareed Zakaria GPS. He said that despite the risks, a crisis of the magnitude seen during the previous recession "would be a great surprise".
Elsewhere, there was little positive news. Data last Friday showed the British economy unexpectedly shrank for the first time since 2012 in the second quarter. Another decline in the third quarter would put Britain in recession, ahead of the nation's expected withdrawal from the European Union on Oct 31.
Meanwhile, German industrial production suffered its biggest annual decline in nine years. All of that raised global recession fears as the escalating US-China tariff war took a toll on trade and investment.
Europe's largest economy gets a health check tomorrow with German data due to reveal whether it managed to avoid shrinking in the second quarter. Big-name companies including Continental, Daimler, BASF and Lufthansa have all slashed their outlooks.