Donald Trump’s “Liberation Day” tariffs last week spooked the markets.
Stock markets tumbled on Monday, with most US markets down and stocks in Hong Kong falling 13.2%, their worst day since 1997 during the Asian financial crisis.
There was slight growth in Asian and UK markets on Tuesday, but recovery is still a way off after a steep decline in reaction to Mr Trump’s tariffs on goods imported to the US, which he announced last week.
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US economists at Goldman Sachs raised their assessment of the odds that America will tip into recession to 45%, up from 35% the week before.
And if most tariffs aren’t reduced or negotiated away, “we expect to change our forecast to a recession”, Goldman’s chief economist Jan Hatzius said in an analyst note.
Other economists are raising similar alarms, with JPMorgan putting the odds of a US and global recession at 60% and projecting inflation will reach 4.4% by the end of this year, up from 2.8% currently.
How do you know if a recession has begun?
The most commonly used definition of a recession is at least two consecutive quarters of economic contraction – or “negative growth” – in gross domestic product (GDP).
To break that down, GDP is the total value of goods and services produced over a specific time period. When it goes up, the economy is considered to be doing well.
When it goes down – negative growth or economic contraction – it’s not doing well. And when it doesn’t do well for six months, it counts as a recession.
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In the US, the National Bureau of Economic Research is the body which officially declares a recession – taking in a variety of economic data, not just GDP, defining it as “a significant decline in economic activity that is spread across the economy and lasts more than a few months”.
Currently, there are no signs the US or global economy is in recession, and it remains unknown if tariffs will have a large enough impact to knock America’s into reverse.
But it is this uncertainty that has the potential to cause the most damage.
“People are all at sea,” Sky News Business Live presenter Darren McCaffrey told the Sky News Daily podcast.
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“No one can quite work out whether President Trump wants a genuine rewiring of globalisation, what the consequences of that will be for the US and globally, and that these tariffs will remain permanent, or whether this is part of a negotiating tactic.
“That’s what no one can work out. That uncertainty is difficult, and it is going to cause damage.”
Stockbroker Russ Mould added that the markets are hoping the Trump administration is planning to use tariffs as a way of extracting better trade deals from existing trade partners. If this happens, it would help restore global trade to what’s been the standard in recent decades.
What could a global recession mean?
If the US and the rest of the world falls into recession – even if the UK doesn’t – it will “fundamentally mean we will all be poorer in the future,” McCaffrey said.
He added that Britain especially has not had a prolonged period of serious economic growth for a long time – held back by the financial crisis in 2008, the shock of Brexit, COVID, the Ukraine war and now US tariffs.
However, it is not all doom and gloom.
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“The markets will always find a way,” McCaffrey says.
“The US is the world’s largest economy, but it is only 13% of global trade. Countries like China, Vietnam, Cambodia and others with high tariffs will find new markets. And one of the places that benefit from that in the short-medium term could be the UK.
“It will also force big wealthy blocs – the biggest of which is the EU – to look for new markets. Canada is also suggesting they would like a trade deal with the UK.
“This will cause damage to the US economy more than anywhere else, because other countries will want to be more reliant on more stable partners. As always with economics, there are winners and losers and ultimately the market will find a place for lots of these goods.”
How could the UK best prepare for potential recession?
Instead of retaliatory tariffs, the UK is looking to secure a post-Brexit trade deal with the US, Russ Mould explained, calling that “the UK’s primary goal”.
But if the UK is stuck with tariffs in the long-term, Mr Mould said it would be wise to consider deals with other countries.
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He said: “Statistics show that 87% of global trade does not involve US, so maybe you can look elsewhere for trade deals with countries who also feel they have been badly treated by tariffs. I would guess India would be at the top of that list.
“The question is how quickly can trade deals be struck, given the fact the UK has been casting the net around for the last five years without a huge amount of progress.”
Read more:
Everything you need to know about Trump’s tariffs
What China could do next as Trump’s tariff war ramps-up
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Mr Mould added that the recipe for economic growth in any market is the growth of the labour force coupled with productivity growth.
“In terms of productivity, [leaders] are probably looking at targeted tax breaks for investment and to stimulate research and development. Other positive things for long-term benefits include examining infrastructure and transport access,” Mr Mould said.
“In terms of encouraging labour participation, you are into the deep waters of whether it is education or tax breaks for child care. All of those are very long-term solutions to a potential near-term challenge.”
Listen to the full Sky News Daily episode here
