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Goldman Sachs: Trade War Boosts Risk of Recession


Aug. 12 2019, Published 9:46 a.m. ET

  • Goldman Sachs cuts US growth forecast for Q4 by 20 basis points to 1.8%.
  • It now expects the latest trade war escalation to impact growth even more.
  • The bank also believes the trade war is increasing the risk of a recession.

CNBC reports Goldman Sachs (GS) has cut its fourth-quarter growth forecast by 20 basis points. It now foresees the trade war impacting growth more than it previously forecast. In a note to clients on August 11, Goldman Sachs chief US economist Jan Hatzius said, “The drivers of this modest change are that we now include an estimate of the sentiment and uncertainty effects and that financial markets have responded notably to recent trade news.”

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Goldman Sachs reduces growth forecast

Trade war concerns have escalated quickly. Especially since Trump announced 10% tariffs on $300 billion in additional Chinese imports, starting September 1. This news led to China weakening the yuan past the seven-per-US dollar mark for the first time in more than a decade on August 5. US markets saw their worst day of the year that day. The Dow Jones Industrial Average (DIA) closed the day 760 points (or 2.9%) lower.

China’s retaliation

China also instructed its state-run enterprises to stop purchasing US agricultural products. Meanwhile, Trump announced that Huawei is a threat to national security, and the US is not doing business with the company. He also said that the US is not ready to make a deal with China. Stocks fell further with these announcements, especially US semiconductor stocks.

Micron (MU), NVIDIA (NVDA), and Skyworks (SWKS) fell 2.6%, 2.6%, and 3.4% on August 9. Huawei is one of these semiconductor stocks’ biggest customers.

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No trade deal before the 2020 elections?

Goldman Sachs’s latest view aligns with its belief that a US-China trade deal won’t happen before the 2020 US election. The bank now expects trade tensions to have a 0.6% impact on GDP, including the 0.2% fall from the latest escalation.

CNBC reported that GS’s Hatzius thinks “financial conditions, policy uncertainty, business sentiment and supply chain distribution will all contribute to lower-than-expected growth as a result of the trade war.” There are other signs growth is sputtering. US manufacturing activity expanded in July but marked the weakest growth in the three years. Slowing domestic business spending and declining exports are key drivers of the downturn. S&P Global expects US corporate spending to slow to 3% after growing 11% last year.

Recession risk rising

Hatzius added, “Fears that the trade war will trigger a recession are growing.” He’s not the only one worried about a recession. Jeffrey Gundlach has put the odds of a recession happening before the 2020 US presidential election at 75%. He thinks the yield curve right now is “full-on recessionary.” Morgan Stanley (MS) has also predicted that if the US levies 25% duties on all Chinese goods and China retaliates, the global economy could contract within three quarters.

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Forecast for the S&P 500

While Goldman Sachs is worried about trade tensions impacting US’s growth, it recently raised its year-end forecast for the S&P 500 (SPY) by 3% to 3,100. However, at the same time, it reduced its earnings estimate by $6. Before the recent trade war escalation, GS set its S&P 500 target for 2020 at 3,400, which implies a gain of 9.7% from its 2019 target.

Where to hide in the US-China trade war

As reported by CNBC, Goldman Sachs thinks investors may want to hide in stocks with little exposure to China’s tariffs to weather the uncertainty. Some such stocks include insurers Allstate (ALL) and Anthem (ANTM). On the other hand, higher tariffs on US cars in China has taken a toll on US carmakers’ profitability. Ford (F), General Motors (GM), and Tesla (TSLA) have all been affected. In the tech sector, Apple (AAPL) and chipmakers have also been facing the heat of trade tensions.


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