Economic output in the U.S. and globally is expected to come in lower by more than 1% through early 2020 due to continued trade policy uncertainty, according to new research from economists and officials at the Federal Reserve.
The research found that global GDP declined by about 0.8% by the first half of 2019 following the initial rise of trade policy uncertainty in the same period a year earlier.
Additional knock-on effects from renewed trade tensions since May are expected to further cut GDP in the second half of 2019 and in 2020, amounting to an overall impact of just above 1%, the Fed researchers warned in a note published online Sept. 4.
"Had trade tensions not escalated again in May and June of 2019, the drag on GDP would have already started to ease in the second half of 2019," the Fed researchers said, referring to the months when the U.S. and China escalated their trade dispute with a new round of tit-for-tat tariff hikes and threats of more levies.
The economic effects of trade tensions are similar across the U.S., advanced foreign economies and emerging market economies, according to the researchers.
"The rise in [trade policy uncertainty] in 2018 and 2019 has gone hand in hand with a slowdown in world industrial production and global trade," they said.
The Fed researchers measured the rise in trade policy uncertainty through text analyses of newspaper articles and transcripts of companies' earnings calls. This metric was then compared with movements in macroeconomic and financial indicators to estimate the GDP impact on the U.S. and other countries.
Fed Chairman Jerome Powell said in August that there are "no recent precedents" for how the central bank should respond to escalating trade tensions, but it stands ready to take action to ensure the U.S. expansion continues.
Despite concerns over trade tensions, a majority of businesses "remained optimistic about the near-term outlook" for the U.S. economy, according to the Fed's Beige Book, an anecdotal summary of Fed officials' conversations with local contacts.
