Trump's Mexico Tariffs to Weigh On U.S. Economic Growth

(Bloomberg) -- President Donald Trump's tariffs on Mexico goods would eat into U.S. growth and increase the potential for a recession, according to several Wall Street economists.

“This definitely adds risk to the downside,” said Jonathan Millar, senior U.S. economist at Barclays Plc, which now expects the Federal Reserve to cut interest rates by 0.75 percentage point later this year. “It throws global supply chains into question and contributes further to the uncertainty already weighing down business investment."

The impact on inflation from the Mexico tariffs would be higher than for the China levies, particularly for food, he said.

That was the prognosis of multiple economists Friday, after Trump took many off guard by threatening to slap tariffs on imports from Mexico unless the country stops the flow of illegal immigration to the U.S. The levies would start June 10 and could reach as high as 25% by October.

The move may affect supply chains and prices as companies face higher charges on several fronts and pass them through to consumers, who account for the largest part of the economy. The U.S. imported about $350 billion in goods from Mexico last year. Tariffs could lower business investment in equipment and personnel just as wage gains pick up, especially at U.S. firms already reeling from levies on China imports.

Here are some of the economists' views:

• Implementing the full 25% on Mexican goods would reduce U.S. growth by at least 0.7 percentage point in 2020 to 1% or below, according to Oxford Economics chief U.S. economist Gregory Daco.
• JPMorgan Chase & Co.'s Michael Feroli reduced his third-quarter growth forecast to 1.5%. “The greater worry -- which could prompt a larger revision -- is that capital spending weakness morphs into hiring caution, and from there into consumer spending,” he wrote in a note Friday. The weaker pace could sway the Federal Reserve to cut interest rates twice this year, he also said.
• Goldman Sachs Group Inc. said in a note to clients Friday that the administration will likely implement at least the first round of tariffs on Mexico goods, lowering the chances of the trade agreement between the U.S., Mexico and Canada being enacted by the 2020 U.S. election.

So far, American consumer sentiment is buoyant amid the trade war with China and ongoing negotiations with other partners including Europe and Japan, according to the University of Michigan. In addition, spending topped forecasts in April, according to government data Friday.

At the same time, the Michigan sentiment reading was lower than a preliminary gauge amid an escalation in the U.S.-China tariff war.

“If Mexico is on the table for additional tariffs, it's quite possible that other countries could be dragged into a larger trade dispute,” Millar at Barclays said. “There are still Europe and Japan and it raises questions: if the administration is willing to have two simultaneous disputes, why stop there? Who's next?”

To contact the reporter on this story: Katia Dmitrieva in Washington at edmitrieva1@bloomberg.net

To contact the editors responsible for this story: Scott Lanman at slanman@bloomberg.net, Margaret Collins

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