Economists at UOB Group assessed the recent escalation in the US-China trade tensions as well as a potential reaction by the Federal Reserve.

“With US-China trade tensions escalating further, we have now entered the Worst Case Scenario of our earlier assessment. Furthermore, the situation could worsen further from here. We now see our base case scenario that US and China imposition of additional tariffs on nearly all bilateral merchandise trade flows will materialise and stay at least in the near-term and there is potential for further retaliations which may involve restrictions on technology transfer and other non-trade measures. Any trade deal, if it happens, may only be in 1H2020 at the earliest. In our New Worst Case Scenario (at 35% probability), services trade and other areas including investment restrictions and rare earth export could become targets while the tariff rate on the entire merchandise trade between the two countries may be increased further. The escalation in US-China trade tensions will probably cause our 2019 growth forecast of 6.2% to drop by 0.1% point if the announced additional tariffs are implemented as scheduled. With 1H19 growth at 6.3% y/y, this would mean that 2H19 growth could be just bordering at 6.0% y/y”.