Global growth continues to cool under the weight of the ongoing trade dispute between the United States and China. Our central scenario is for growth to muddle along with risks pointed to the downside. Worries about a potential recession in the United States have increased in recent weeks because of the trade rift, weaker growth in Asia and Europe, and movements in the Treasury bond market. We believe the probability of a recession is a little below one-third. While manufacturing activity is slowing, the U.S. economy is continuing to add jobs, but at a more modest pace.
President Trump’s tariffs on Chinese exports are also beginning to seriously impact the overall Chinese economy, the world’s second largest. As a result, we are now more worried about the resilience of international financial markets and capital flows should China’s downturn worsen. Elsewhere, political turmoil and shifting policies in the United Kingdom, Italy, and Argentina are having a knock-on effect on financial markets. In particular, Boris Johnson, the pro-Brexit campaigner who became Britain’s new prime minister in July, has faced a chaotic first few weeks in office.