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Morgan Stanley: If the trade war escalates, a recession will be here in 9 months

Key Points
  • Morgan Stanley thinks a global recession will come if the trade war escalates through the U.S. raising tariffs to 25% "on all imports from China for 4-6 months."
  • "As we view the risk of further escalation as high, the risks to the global outlook are decidedly skewed to the downside," Morgan Stanley chief economist Chetan Ahya says.
  • China has promised to retaliate to new tariffs that President Donald Trump said will begin on Sept. 1.
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If the U.S. continues to raise a wall of tariffs on Chinese goods in the coming months and China responds, expect a global recession in three quarters, Morgan Stanley said Monday.

"As we view the risk of further escalation as high, the risks to the global outlook are decidedly skewed to the downside," Morgan Stanley chief economist Chetan Ahya said.

The firm believes a global recession will come in about nine months if the trade war further escalates through the U.S. raising tariffs to 25% "on all imports from China for 4-6 months," Ahya said. "We would see the global economy entering recession in three quarters," he said in a note to investors.

President Donald Trump on Thursday unexpectedly announced that, beginning Sept. 1, the U.S. will add levies of 10% on the remaining $300 billion in Chinese imports that had not previously faced duties. These new tariffs "raise downside risks significantly," Ahya said.

"About two-thirds of goods tariffed in this round are consumer goods, which could lead to a more pronounced impact on the US as compared to earlier tranches," Ahya said. "Trade tensions have pushed corporate confidence and global growth to multi-year lows."

The Chinese yuan has already weakened below a key level, which Reuters reported came after the Chinese central bank set the midpoint of the yuan's price against the dollar at its weakest level since December. Trump and some analysts attributed the currency's weakening as retaliation by China, although the country's central bank denied that it made the move as an intentional response.

"Global central banks, in particular the Fed and ECB, will provide additional monetary policy support," Ahya said. "But these measures, while helpful in containing downside risks, will not be enough to drive a recovery until trade policy uncertainty dissipates."

– CNBC's Michael Bloom contributed to this report.