Source : THE AGE NEWS
By Eir Nolsoe and Louis Goss
Donald Trump’s tariffs will tip the world’s largest economy into recession, America’s biggest investment bank has warned.
Investment bank JP Morgan has torn up its growth forecasts for the US after global stocks tumbled and wiped more than $5 trillion ($8.3 trillion) off America’s most valuable companies in only two days.
Donald Trump 2.0 is going harder and sooner on his fanciful American dream of restoring American manufacturing’s glory days.Credit: AP
The investment bank downgraded US growth by 1.6 percentage points for this year while predicting far higher unemployment that could leave nearly 2 million additional Americans jobless.
Michael Feroli, JP Morgan’s chief US economist, said: “We now expect real GDP to contract under the weight of the tariffs. For the full year, we now look for real growth of -0.3 per cent, down from 1.3 per cent previously.”
The bank’s warning came as America’s baseline 10 per cent levies on almost all countries, including Britain, took effect.
Other investors said the trade war ignited by the White House on April 2 threatened to plunge the UK’s debt-bloated economy into a Greek-style debt crisis.
It followed China imposing its own retaliatory tariffs of 34 per cent on all US imports on Friday (Saturday AEDT) as the world’s two largest economies squared off.
Markets also took fright as Trump vowed his policies would “never change” and “only the weak” would fail as the sell-off deepened.
Meanwhile, Britain’s weaker economy coupled with the Treasury’s razor-thin headroom leaves the UK exposed to a “negative spiral” similar to Greece’s debt meltdown a decade ago, according to one of the world’s biggest investment firms.
Neil Robson, the head of global equities at Columbia Threadneedle, said Britain’s £2.8 trillion ($6 trillion) debt pile, which nearly outstrips the size of the economy, leaves it vulnerable as Trump’s tariffs increase the risk of a global recession.
Robson said: “We have had a Liz Truss moment here in the UK. Could we have a Labour version of that? Possibly. I think it’s quite likely.”
He said Britain’s current financial situation mirrored the lead-up to the eurozone meltdown when bond markets turned aggressively against Greece when investors suddenly realised the country could not balance its books.
He said: “If you think about the problem of being very indebted, you can be as indebted as you like as long as your nominal growth is higher than your interest rate.”
“But if ever your nominal GDP growth stalls – not just on a temporary basis – below your interest costs then you’re in a real negative spiral, and it can move really quickly. We saw that with Greece during the great financial crisis.”
British Chancellor Rachel Reeves had banked on faster economic growth to offset the UK’s rising debt bill over the next five years, but an expected economic slump from The the US president’s trade war has left that plan in tatters.
Trump slapped a flat 10 per cent tariff on all nations, rising to as high as 50 per cent for the worst off.
Although Britain escaped with the flat 10 per cent rate, its exposure to the global economy means growth forecasts are likely to be pared back and could trigger a crisis for UK debt, known as gilts, which are bought and sold by global investors.
‘Double blow’ for Britain
Bruno Schneller, the managing partner at Erlen Capital Management, warned that the bond markets could turn against the UK if investors lose faith in Reeves’s economic plan.
“ Trump’s tariff blitz risks triggering a global stagflation shock – and for the UK, that’s a recipe for a gilt crisis,” he said.
“Slower growth, higher inflation and a jittery investor base could combine to push UK borrowing costs higher at the worst possible time. This isn’t just trade war fallout; it’s the kind of external shock that can crack already fragile debt markets.”
He added: “Trump’s tariffs could deal a double blow to the UK – stalling global growth while fuelling inflation. That’s a nightmare for any chancellor trying to stabilise debt. If markets lose confidence in the UK’s fiscal path, a gilt sell-off isn’t just possible – it’s probable.”
It follows a dramatic week for the global economy after the scale of Trump’s tariffs blitz caught markets by surprise.
The turmoil also prompted JP Morgan to raise the risk of global recession this year to 60 per cent from 40 per cent as investor panic rattled stock markets around the world.
Federal Reserve chairman Jerome Powell said the US president’s tariff increases were “significantly larger than expected”.Credit: AP
Although UK gilts have been boosted so far by Trump’s tariffs, investors have warned this could soon change.
“If Trump doesn’t course-correct, this crisis will affect many different areas in global markets,” said Harald Berlinicke, a partner at Sarnia Asset Management.
Risk of more tax rises
The gloomy message comes shortly after the chancellor slashed welfare benefits to restore £9.9 billion of fiscal headroom at the Spring Statement. The Office for Budget Responsibility warned that in a worst-case scenario, a full-blown trade war risked wiping out all the margin of error she had left herself against her fiscal rules.
This means that after a record £40 billion tax-raising budget in October, Reeves may be forced to come back for more tax increases in her autumn Budget.
Trump has vowed to persist with his aggressive tariffs despite last week’s market bloodbath, insisting “it’s going very well” and that the economy is “healing”.
The turmoil would be “something we are going to remember for a very long time”, Robson said.
“Risks of recession have clearly gone up. I don’t see why there won’t be a recession at the moment. It’s difficult to see what the solution is unless America walks back on this,” he said.
Some of the world’s most important financial leaders have warned Trump that his aggressive trade policies will wreak havoc by depressing growth and fuelling inflation.
Jerome Powell, the chairman of the US Federal Reserve, said on Friday that the president’s tariff increases were “significantly larger than expected” and so the same would “likely be true of the economic effects”.
Kristalina Georgieva, the chief of the International Monetary Fund, also warned: “Tariff measures clearly represent a significant risk to the global outlook at a time of sluggish growth.”
Business confidence had already slumped by a third between the middle and end of 2024, according to ADS. The trade association for aerospace, defence, security and space warned that half of businesses were planning to cut investment this year.
Aimie Stone, the ADS chief economist, said the survey “should act as a warning signal that industry confidence is wavering”.
The Telegraph, London
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