Wells Fargo Warns US Trade War Fallout Could Deepen in Coming Quarters

Despite signs of a market recovery in early May, Wells Fargo economists are sounding the alarm over the ongoing effects of the US-China trade war, warning that the worst economic consequences may still lie ahead.

In a recent market update, the bank stated that the US economy remains vulnerable, with the drag from trade tensions just beginning to impact growth. The analysts highlighted that the first-quarter GDP contraction, largely driven by weaker trade activity, could mark the start of a broader slowdown.

Wells Fargo Expects Continued GDP Headwinds

“The economy isn’t out of danger yet,” the report cautioned, noting that GDP growth could face significant turbulence in the coming months. Analysts anticipate sluggish performance in Q3, attributing this to a sharp decline in consumer and business spending after a surge in purchases made to beat anticipated tariffs.

Wells Fargo pointed out that real net exports reduced GDP by 4.8 percentage points in Q1—a negative contribution not seen in over five decades. The surge in pre-tariff imports, which temporarily inflated activity, is now expected to reverse, leading to weaker trade flows and slowing inventory restocking.

Tariff Pressure Could Complicate Fed Policy

Even if tariffs are eased or removed in the near future, the report suggests businesses may already be holding excess stock and could cut back on future orders. This would limit any near-term rebound in trade volume.

In response to the economic slowdown, Wells Fargo forecasts the Federal Reserve will cut interest rates, expecting the benchmark fed funds rate to decline to 3.50% in the second half of the year. However, the bank cautioned that inflation may rise due to tariff-related price pressures, creating a complex scenario for monetary policy.

“The Fed is likely to tolerate some inflationary pressure from tariffs,” the analysts noted, “as long as long-term inflation expectations remain anchored.”

Uncertainty Remains High Amid Trade and Market Volatility

Wells Fargo stressed that tariffs are introducing substantial uncertainty into the US economic outlook. Future stability, the bank suggests, will depend on the success of international trade negotiations, a controlled deceleration in the labour market, and resilient consumer spending.

“It won’t be easy to engineer a soft landing,” the analysts concluded, warning that the road ahead could be bumpy unless key economic indicators hold firm.

(Sources: investing.com, reuters.com)