Tariffs will take toll on US economy, warns UBS

A tricky period lies ahead for the US, warned UBS, as Donald Trump’s trade war with China begins to exert a sizeable but passing influence on an economy enjoying multi-decade lows in unemployment and undergoing monetary tightening.

The US president, arguing that American companies are struggling to compete, has imposed tariffs on $200bn of Chinese goods, around 40% of the items imported into America from China. In return, China has imposed its own trade restrictions on US goods.

Global equity markets have come under pressure as they try and assess what impact the escalating spat will have, and on Thursday UBS published a note saying it expected tariffs to “take a toll” on the US economy.

It continued: “While the average firm in the US can likely withstand a rise in costs, new, vulnerable firms will not. Many newly established manufacturing plants may close permanently, while other plants that would have expanded may pull back from hiring and investment.”

It predicts that tariffs will subtract 100 basis points from US GDP and reduce employment by around 351,000.

“Growth then accelerates by the end of the first quarter next year and by the middle of the second quarter, has returned to its pre-tariff pace. Because of that dip in activity, the Federal Reserve pauses in December and pushes the March hike [in interest rates] to the April/May meeting.”

UBS has pencilled in three increases to the cost of borrowing in 2019.

It has also predicted an ongoing decline in imports of tariffed goods. “We now have enough post-tariff data to be confident that that the effects on trade volumes of these goods are and will be large. We have also seen slowing in manufacturing, employment and output, as well as slowing in retail employment that are consistent with our forecast."

However, the analysts conceded: “Nonetheless, we are still some way from knowing if our forecast will become reality," adding that they would be in a better position to judge by early December.

In August, imports were 31% below pre-tariff levels with “no obvious signs” of other countries increasing exports to fill the gap. The latest round of tariffs was announced in July and implemented towards the end of September.

“We expect imports of goods to fall in October and November followed by a more severe decline in January as the tariffs ratchet to 25%,” UBS noted.