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US growth forecast tilted to the downside on trade war escalation – Wells Fargo

Analysts at Wells Fargo, kept their forecast for US growth but warn that the recent escalation of the US-China trade war skews the risks to the downside.

Key Quotes: 

“In the forecast that we released on May 8, we projected that U.S. real GDP would grow 2.8% in 2019 and 2.1% next year. Because the United States and China may still eventually agree to a trade deal, which would lead authorities to rescind the tariffs, we have not made any formal changes to this forecast. However, we readily acknowledge that the risks to our GDP forecast are skewed to the downside.”

“We estimate that higher tariffs on Chinese goods could lift consumer price inflation between 0.1 percentage point, if duties are confined to only $200 billion of Chinese imports, and 0.4 percentage point, if duties are placed on all Chinese goods. Everything else equal, higher inflation would reduce growth in real disposable income, which could erode growth in real personal consumption expenditures (PCE).”

“The stock market has weakened recently because of trade tensions, and continued declines in equity prices would impart a negative wealth effect on real PCE as well.”

“We maintain our view, which we have highlighted previously, that a trade war probably would not lead to a U.S. recession. But we also acknowledge a trade war would weigh on overall GDP growth.”

“It appears that President Trump will meet Chinese President Xi on the sidelines of the G-20 meeting in Japan on June 28-29. The two leaders could potentially agree on a deal, or at least a potential truce, at that meeting. However, if negotiations fall apart, we will need to make the changes to our current forecast that are discussed above.”

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