Global economic growth could be reduced by around 1 percentage point if current tariff threats spiral into a full-blown trade war, S&P Global's chief economist, Paul Gruenwald, said.
While it may not result in a global recession, "one could imagine a scenario where rather than global growth in the threes we have global growth in the twos, where you get the U.S. and Europe and China all pulling back at the same time," Gruenwald told CNBC.
The warning came after U.S. President Donald Trump said May 29 that he would impose tariffs on $50 billion of goods from China while the two countries continue to work out a trade deal. China, in response, warned on June 3 that trade agreements with the U.S. will be void if Trump goes ahead with his threat. Trump has also imposed 25% tariffs on aluminum and steel imports from the EU, Canada and Mexico, triggering pledges of retaliation.
Gruenwald said the rising threat of a trade war remains "a tail risk."
"The baseline is still the synchronized upturn, but what's been happening is the risks have been shifting to the downside, so everyone is paying attention to these scenarios that look maybe a little more plausible than they did before," he added.
Asian markets rallied on June 4 even amid reports of China's threats to retaliate against potential U.S. tariffs. However, Gruenwald cautioned that while the narrow trade impact of such moves would be small, second order impacts might lead to more market-moving turbulence.
"Folks spend less money, firms lower CapEx, then you get to something that really moves the needle and the markets don't seem to be taking that into account," he said.
Global GDP growth is expected to rise to 3.8% in 2018 and 3.9% in 2019, up from 3.7% in 2017, according to the Organization for Economic Co-operation and Development's outlook report in May. The OECD also cited trade tensions as a primary downside risk to growth.
