- Saxo Bank warns the global economy is entering one of the most dangerous periods since the Berlin Wall fell.
- Rather that a market-friendly outcome, it says the risks are that trade tensions will become a full-blown trade war.
- Markets appear to be relaxed about what lies ahead, but it’s only a problem when enough people think it’s a problem.
Steen Jakobsen, Chief Economist at Saxo Bank, is a man who’s never been afraid to make a bold market call.
Indeed, he’s renowned for it.
He’s made another one in Saxo Bank’s latest quarterly outlook, suggesting that trade tensions between the United States and China could end “very badly”.
“Global tensions are ratcheting higher by the day, fuelled by the foolish policies of foolish leaders,” he says.
“Tit-for-tat trade wars and agendas that pander only to self-interest are jeopardising the global economy.”
Jakobsen says that as we approach the deadline where the US will slap 25% tariffs on $US34 billion worth of Chinese imports, the global economy is entering one of the most dangerous period since the Berlin Wall fell in 1989.
“The ‘trade war’, which was never supposed to happen in the first place, is now making headlines every day,” he says. “The short-sightedness of the world’s governments is remarkable, and given the history of trade wars, profoundly alarming.”
In his opinion, there’s three ways this trade war may play out, and none will be beneficial for the global economy.
Here’s the three possible pathways he sees, along with the probability of each playing out:
- 1. A ‘mild’ crisis where the US, China, and Europe all reach higher tariff levels but stop short of creating outright ‘walls’ – probability: 25%.
- 2. A more severe crisis with escalating trade tensions into the November 6 US mid-term elections and beyond where President Trump must show his base that he is living up to his promises of ‘getting the US a better deal’ – probability: 50%.
- 3. A move on par with the Smoot-Hawley Tariff Act of June 1930 – probability: 25%.
“Note that every one of these scenarios leads to weaker global growth,” Jakobsen says.
“There are no winners in a trade war, and the trend is pointing in the wrong direction as nationalist agendas erode the status of global institutional frameworks.”
As the probabilities suggest, Jakobsen believes there’s a high likelihood that trade tensions will turn into a full-blown trade war, something that history suggests could end badly for the global economy.
“The worst example was the US Smoot-Hawley Act of 1930, which raised tariffs by 45% on over 20,000 imported goods,” he says.
Global trade fell by 65% in response, contributing to the onset of the Great Depression.
Jakobsen says financial markets are incredibly complacent about the possibility of a substantial escalation in trade barriers in the period ahead.
“Consensus still holds that an outright trade war will be avoided, but this ignores the mid-term elections in the US,” he says.
“It’s not just about Trump, either — it also has a lot to do with China’s move to raise its global profile along every axis.
“Waning global growth, falling credit impulses globally, and massive complacency on the risks of a trade war are our unfortunate warnings for the rest of 2018.”
While Jakobsen is renowned for marking outlandish calls, it’s pretty clear from the recent behavior of financial markets, except in China, that complacency levels are elevated despite no one really being sure as to how it will all play out.
There’s a lot of assumptions out there, but as we’ve seen time and time again in markets, it’s not a problem until enough people think it’s a problem.
And when that sentiment tide turns, things can get nasty fast.