(Reuters) – Deutsche Bank (DE:) said on Tuesday that it now forecasts another 100 basis points of rate cuts and see growth falling to below 1.5% by mid-2020, assuming there is no escalation in the trade war between the United States and China.
“If the conflict picks up, the U.S. risks zero rates and a mild recession,” David Folkerts-Landau, group chief economist, said in a note to clients. He said the European Union is at even greater risk for a recession.
The Federal Reserve cut rates for the first time in more than a decade in July as it tried to insulate the United States from President Donald Trump’s trade war and a global slowdown. Market pricing suggests that investors expect another quarter-point reduction when the Federal Open Market Committee holds its two-day meeting beginning Sept. 17.
“In the U.S., our economists have revised down their growth forecasts, largely as a result of trade uncertainty,” Folkerts-Landau said. “Manufacturing is contracting and there are cracks in the otherwise strong labor market.”
Folkerts-Landau said: “Larger action from the Fed will raise the pressure on other central banks to respond.” He said the firm’s analysts expect the European Central Bank to cut policy rates and possibly restart asset purchases.
“However, at a certain point, increasingly negative rates become counterproductive,” he said. “We’re not certain where the reversal point lies, but it would be better not to experiment with the world’s second largest economic area.”
In China, growth is undoubtedly slowing due to the adverse impact of U.S. tariffs but officials have some space to respond, Folkerts-Landau said. “Policy support has not yet filtered through to the real economy, but we expect that rate cuts will begin to stabilize activity later this year, albeit with growth at a slower rate.”
Folkerts-Landau said: “Although our economists think a recession can be avoided I would not be surprised if the EU tipped into one and the U.S. came close. My central scenario is still that the policy cushion available to the Fed will allow the U.S. to avoid a downturn, but I am not as confident anymore.”
He said he believes that aggressive easing by the ECB will “only serve to rob investors and consumers of confidence and that it will be the last nail in the coffin of the expansion. The path for global economic activity and risk assets has become unusually dependent on the ability of the U.S. administration to avoid an outright trade and tech war.”
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