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UBS: World economy ‘one step away from global recession'

The world economy is on the leading edge of a recession, UBS said on Monday, which could prompt all major central banks to ease monetary policy in response.

The U.S.-China trade war is amplifying fears of a global downturn —which according to UBS means President Donald Trump may get his wish for the Federal Reserve to cut interest rates.

Thus far, the world’s two largest economies have not been able to strike a deal to end their trade dispute, and an additional $300 billion worth of tariffs are currently on the table.

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“U.S. tariff escalation is NOT our base case,” the bank said. “But if escalation is not averted in the next week or so ... we anticipate making major changes to our forecasts.

It added: “We estimate global growth would be 75 [basis points] lower over the subsequent six quarters and that the contours would resemble a mild ‘global recession’” that would rival Europe’s debt crisis and the oil collapse of the mid-1980s, according to UBS analysts.

“If we are right on the growth impact, all major central banks would ease,” the bank’s analysts wrote in their report, given the fragile state of the world’s economy.

The Fed is expected to cut interest rates as early as next month. UBS estimates the central bank would be poised to cut an additional 100bp— on top of an expected 50bp in July.

Under that scenario, the US economy would be flying “dangerously low to the ground,” but would avoid a recession, UBS said.

It would take slapping tariffs on Mexico — something the U.S. narrowly averted earlier this month when Trump rescinded his plans to do so — for the Fed to cut rates to zero, and to restart asset purchases, the bank added.

Meanwhile, the European Central Bank and the Bank of Japan “would push further into the negative territory (-70bp and -25bp),” while China would also ease, according to UBS.

The global trade tensions will also impact stocks, with stocks finally finding a bottom in early 2020, according to UBS. Meanwhile, Treasury yields will fall further, while the U.S. dollar will stay supported.

Donovan Russo is a writer for Yahoo Finance. Follow him @Donovanxrusso.

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