US, China trade war will push world towards recession, says Morgan Stanley

Reserve cut US interest rates back to zero within a year if the world economy heads to recession, says Morgan Stanley.

A collapse of US-China trade talks and hike in tariffs on Chinese goods would push the world economy towards recession and see the Federal Reserve cut US interest rates back to zero within a year, analysts at Morgan Stanley said on Monday.

While a temporary escalation of trade tensions could be navigated without much damage at all, a lasting breakdown would inflict serious pain.

"If talks stall, no deal is agreed upon and the U.S. imposes 25% tariffs on the remaining US$300 billion of imports from China, we see the global economy heading towards recession," the bank's analysts said in a note.

In response, the Fed would cut rates all the way back to zero by spring 2020 while China would scale up its fiscal stimulus to 3.5% of GDP (equivalent to around $500 billion) and its broad credit growth target to 14-15% a year they added.

"But, a reactive policy response and the usual lags of policy transmission would mean that we might not be able to avert the tightening of financial conditions and a full-blown global recession."

A global recession is defined by growth dipping below the 2.5% a year threshold.