A top economist warns Trump's China trade war is doing more damage to the US economy than people think

Christian Hartmann/Reuters

Trump's trade war will hammer the US economy.

• Seth Carpenter, the most senior US economist at UBS, says that the trade war is already having an outright negative impact on the US economy.
• UBS expect that the tariffs will halve the speed of GDP growth in the world's largest economy this quarter.
• They will also lead to the collapse of many small manufacturing firms, which have wafer thin margins, and will not be able to adapt to rising prices.
• "We are outliers compared to the rest of Wall Street in terms of how big an effect the tariffs have on the US economy."

President Donald Trump's trade war is already wiping out small American manufacturing businesses and it's going to have a more negative impact on the US economy than most are expecting, say economists at Swiss banking giant UBS.

Tariffs imposed by Trump on Chinese goods and China's retaliatory levies will halve the speed of GDP growth in the world's largest economy, said Seth Carpenter, UBS' top US-focused economist.

"We are outliers compared to the rest of Wall Street in terms of how big an effect the tariffs have on the US economy," he said in London on Thursday at the launch of the bank's 2019 Global Economic Outlook. "We expect a material slowing in the fourth quarter of this year - so right now - into the first quarter of next year."

He pointed to official UBS forecasts, which see annualized growth at 1.7% in the fourth quarter, and just 1.5% in the first quarter of 2019. The annualized growth rate, as reported by the Bureau of Economic Analysis, was 3.5% - which already represented a slowing from the previous quarter, and showed a significant negative impact from the trade war.

Read more: Trump's trade war took a stunning bite out of the US economy, and it's the strongest evidence yet that he's shooting himself in the foot

Most of the slowdown, UBS says, is likely to come in the manufacturing sector, which is much more sensitive to changing prices for raw materials. The impact is likely to be so acute that many new manufacturers are likely to go out of business.

Yet much of Trump's reasoning behind the trade war is to reinvigorate the US manufacturing sector.

Here's the key extract from Carpenter's presentation on Thursday (emphasis ours):

The US economy has created more manufacturing jobs in the past year than at any point since the 1990s. We know from a variety of different sources that the vast majority of that increase in employment is coming at brand new firms. Brand new firms notoriously have very thin margins and a lack of ability to pass on costs. Small cost shocks tend to cause large disruptions to new firms. We see some of these new firms failing, others of them failing to expand in a way they would have otherwise.

Carpenter's warning about the negative impacts of the trade war are the latest in a chorus of warnings about the consequences of the president's policies. Earlier this week, for instance, the world's biggest shipping company, Maersk, argued that the trade war is already having a material impact on global trade.

Carpenter did however, offer some reassurance.

"What we know from manufacturing, especially in the United States, is that you have very lean inventories, you have fragile but easy-to-repair supply chains," he said. "And so when there's a hit, the swing in quantities is large, but fairly short-lived."

UBS forecasts that annualized growth in the second quarter of 2019 will be around 2.7%.