US-China trade reprieve makes no dent on recession chances

BENGALURU (Reuters) — The recent truce in the US-China trade war is not an economic turning point and has done nothing to reduce a significant risk that the US could slip into recession in the next two years, a Reuters poll of economists found.

Collateral damage from the trade conflict between the world’s two largest economies has hit financial markets and forced most major central banks to cut interest rates this year.

The Oct. 18 to 23 Reuters poll of more than 100 economists found growth and inflation views for the coming year and beyond barely changed, despite a White House announcement about a “phase 1” deal with China and suspension of tariffs scheduled to kick in this month.

“US-China trade negotiations over the past 18 months have been a classic case of ‘one step forward, several steps back.’ Despite recent encouraging noise on trade talks, there are more tariffs in place than three months ago,” noted Ajay Rajadhyaksha, head of macro research at Barclays in New York.

“Our forecasts suggest that below-trend US growth will persist for much of 2020. We still feel that the US and the world economy will avoid recession in the coming months, but the US will not be a global locomotive, as it was in 2018.”

The median probability of a US recession in the next 12 months rose to 35 percent from 30 percent predicted a month ago - the highest percentage in this economic expansion. For the next two years, it held at a high 45 percent.

In response to an additional question, 75 percent of economists said the recent trade development between Washington

and Beijing was not a turning point in easing uncertainty.

That conclusion was evident in the consensus for US economic growth, which is expected to slow to 1.6-1.7 percent on an annualized basis each quarter between now and end2020, down from two percent last reported.

The range of growth forecasts for the second half of this year showed lower highs and lower lows, underscoring fears the US economy is still losing momentum after a short sugar rush from aggressive tax cuts passed in late 2017.