Mark Carney has warned that Donald Trump’s battle with China over tariffs has created a “hostile and uncertain” trading environment that could "shipwreck" the global economy.
“Over the past year, the global economy has shifted from a robust, broad-based expansion to a widespread slowdown”, the Bank of England governor said in a bleak assessment on Tuesday.
The US president hit China with further tariffs in May and June, adding to levies already imposed on hundreds of billions of Chinese imports. He also threatened to raise tariffs on Mexican goods, despite only having recently agreed a revised trade deal with America’s neighbour.
Mr Trump also issued threats to the EU to slap tariffs on $4bn of its goods in a dispute over aircraft subsidies while Vietnam is the latest country to come into his crosshairs.
“The latest actions raise the possibility that trade tensions could be far more pervasive, persistent and damaging than previously expected,” Mr Carney said.
The pound fell to below $1.26 on the back of a gloomy speech from the typically measured BoE Governor.
Mr Carney told a conference of the Local Government Association (LGA) in Bournemouth that the “more febrile” atmosphere in recent months had sent fears of a full-blown trade war shooting to the top of a list of risk most worrying investors.
This in turn has sharply reduced expectations for corporate earnings and sent business confidence in the G7 to its lowest level in five years with manufacturers particularly gloomy about their prospects. Households have also become more downbeat about the economic outlook - though not their own personal prospects - Mr Carney said.
While Mr Trump’s aim is to put America first in his trade policy, the Bank of England forecasts that his actions will have precisely the opposite efect, damaging the US more than its trading partners.
The direct impact of new tariffs so far remains small at around minus 0.2 per cent of global GDP, but the effect of proposed additional 25 per cent taxes on almost all US-China trade would quadruple that effect to minus 0.8 per cent.
The US economy would take a 2.1 per cent hit to its economy as a result, compared to 1.2 per cent for China. The UK will see its own GDP suffer by 0.4 per cent, according to the BoE’s latest estimate.
But Mr Carney warned that even these numbers may underestimate the effects on a world economy characterised to an unprecedented degree by internationally integrated supply chains.
“In this regard, the early indications are not promising, Mr Carney warned.
“The more hostile and uncertain trading environment is coinciding with sharp slowdowns in global trade, manufacturing, industrial production and capital goods orders.”
He added: "Whether current trade tensions shipwreck the global economy or prove to be a tempest in a teacup will have an important influence on the outlook for growth and inflation in the UK."
