Trump trade war will be worse than the GFC: KPMG

Takeover fever is gripping our market, which is weathering the global market turbulence a lot better than most were expecting. But this isn’t the time to get complacent as the threat of global trade war could be far worse than the impact of the global financial crisis (GFC).

That is the assessment by auditing and accounting firm KPMG, which is warning that an escalating trade war is likely to tip much of Europe, the United Kingdom and Canada into a recession!

So while the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is defying the overnight meltdown in the US stock market as the $13.5 billion takeover bid for Santos Ltd (ASX: STO) summons forth the animal spirits in us, KPMG reminds us that it won’t take much to lop-off a big chunk of Australia’s economic growth.

Trade modelling undertaken by the firm shows that an average 10 percentage point lift in tariffs on goods will cut Australia’s gross domestic product (GDP) by 1% and wipe out as many as 285,000 jobs – or more than half the employment gains in the last year – according to an article in the Australian Financial Review.

While that will result in as much pain as the GFC inflicted on us, the pain will last longer as the global economy isn’t as open as it was a decade ago, notes KPMG.

China has just announced a 25% tariff on 128 US imports into its country in a tit-for-tat move triggered by US President Donald Trump’s decision to slap tariffs on Chinese imports as a punishment for Beijing’s theft of US intellectual assets.

KPMG believes that a modest 5% increase in tariffs on all imports of manufactured goods around the world would shave-off 1.3 percentage points from global economic growth, which the International Monetary Fund (IMF) is currently forecasting to reach nearly 4% in 2018.

There will be no safe spots on our market to hide from a trade war but its stocks with significant exposure to Europe and the UK have the most to lose.

This includes the likes of international logistics company Brambles Limited (ASX: BXB), fast food chain Domino’s Pizza Enterprises Ltd. (ASX: DMP), rubber products maker Ansell Limited (ASX: ANN) and airline operator Qantas Airways Limited (ASX: QAN).

The trade war could even hasten Wesfarmers Ltd’s (ASX: WES) retreat from the UK following its disastrous decision to expand its Bunnings business into that market.

Interestingly, the US seems to have less to lose from a trade war, added KPMG. This could unfortunately prompt President Trump to go harder than he would normally against his country’s major trading partners.

But Trump has shown that his bark is worse than his bite. This is giving hope that any tit-for-tat tariff will be well contained, and that would be a good outcome for stocks.

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Motley Fool contributor Brendon Lau owns shares of Brambles Limited. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool Australia has recommended Ansell Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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