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The escalating trade war between the U.S. and China drew fresh headlines this week as economists start to hit the panic alarm over what it may mean for the global economy.

Here’s our weekly review of the world economy and the lessons learned.

Trade War Fallout

The team at Bloomberg Economics published new estimates in which an extreme all-out trade war scenario would wipe almost $600 billion from global gross domestic product in 2021 compared to a scenario in which there were no hostilities. Wall Street economists are also turning more pessimistic with Goldman Sachs Group Inc., Nomura Holdings Inc. and JPMorgan Chase and Co. among those rewriting their forecasts. Nomura sees a 65% chance that the U.S. imposes duties on all of its imports from China by the end of the year.

Read More:

• Trump-China Feud Echoes Another U.S. Trade War Two Centuries Ago
• Trade War Q&A: Top Live Transcript
• U.S., EU, Japan Push for Pact to Rein In China’s State Subsidies

On the Defense

Central banks across Asia sought to defend their currencies from recent declines as the trade war takes hold. They seem most intent on keeping their exchange rates steady and stopping money from escaping rather than engaging in devaluations to boost their competitiveness. China is trying to stop the yuan from weakening so as to ensure capital doesn’t flee. Meantime, authorities in South Korea called a snap meeting to discuss the won’s slide, which they called excessive. Bank Indonesia also expressed concern about the rupiah. Adding to the gloom, U.S. restrictions on China’s telecom giant Huawei are threatening Asia’s technology powerhouses and Japanese exports fell for a fifth straight month.

Pledging Patience

Despite the rise in trade tensions, Federal Reserve officials signaled they are in no hurry to cut interest rates even as investors bet on a reduction by the end of the year. U.S. central bankers do though worry a prolonged period of inflation readings below their target could begin to erode public confidence in their ability to hit it. The Fed’s staff are already losing faith in the ability to return inflation to 2%, while one former central banker wants them to raise their sights. Iceland became the first central bank in western Europe to cut rates, but Israel is struggling to do so.

Read More:

• Some ECB Officials Saw Inflation as ‘Uncomfortably’ Low in April
• QE May Be Over, But the Fed’s U.S. Debt Hoard Is Set to Double
• Decision Time for World’s Longest-Serving Central Bank Boss
• Powell Just One Global Central Banker Under Political Pressure
• ECB Plumbs Secret Data to Show Lending Boost From Negative Rates

The Ballot Box

Politics is impacting economics worldwide. Indian Prime Minister Narendra Modi is heading towards re-election although will face deep-rooted economic challenges. Australia’s center-right government pulled off a surprise election victory and immediately pledged to cut taxes to shore up a slowing economy. In the U.K. Prime Minister Theresa appears not to have long left in power with her economic legacy dominated by the fallout from Brexit. Among emerging markets, Turkey is paying the price for its pre-election efforts to tinker with markets.

Latin America Woes

The southern cone is looking wobbly amid the trade war and as it remains undermined by years of policy errors. Argentina’s economy contracted more than expected in March, while Chile stalled and Peru grew in the first quarter by the least since 2017. As for Brazil, economists there are cutting their forecasts for growth and now expect a third year of meager economic performance.

Weekend Reading and Listening

• Pick the ECB’s Next President (Game)
• Trump’s Tariffs Send Shock Waves Through Spain’s Olive Groves
• The Streak Down Under (Stephanomics Podcast)
• Economics Reinvents Itself Every Few Decades. It’s Happening Now
• How Channeling the Ivy League Helped a Maori Tribe Earn $1.3 Billion
• Here’s How Fast China’s Economy Is Catching Up to the U.S.

Chart of the Week

To contact the author of this story: Simon Kennedy in London at skennedy4@bloomberg.net

To contact the editor responsible for this story: Zoe Schneeweiss at zschneeweiss@bloomberg.net

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