As the trade war between the US and China continues to escalate, many economists are concerned that it is pushing the global economy into a slowdown, which could lead to recession. The Chinese currency hit its lowest point in a decade, below 7 yuan to a US dollar, causing the US to accuse them of manipulating the currency.

Investors are demanding politicians and central bankers to course correct at the earliest so as to avoid a slowdown in the economy.

In the U.S. alone, the recession risk is “much higher than it needs to be and much higher than it was two months ago,” Lawrence Summers, a former U.S. Treasury secretary and a White House economic adviser during the last downturn, told Bloomberg Television. “You can often play with fire and not have anything untoward happen, but if you do it too much you eventually get burned.”

“We may well be at the most dangerous financial moment since the 2009 Financial Crisis with current developments between the US and China,” former US Treasury secretary Lawrence Summers tweeted on Tuesday.

The effect of this has been observed all over the world. New Zealand’s central bank on Wednesday stunned investors by dropping its benchmark rate by 50 basis points, double the expected reduction and sending the kiwi tumbling. Thailand also surprised, cutting by 25 basis points. India’s central bank lowered its rate by an unconventional 35 basis points. June data on industrial production in Germany, Europe’s biggest economy, showed the biggest annual slump in a decade.

While central banks would likely cut interest rates and perhaps resume quantitative easing, that may no longer be enough to revive animal spirits this time and governments might not be fast enough to loosen fiscal policy.

Sources – Economic Times, Bloomberg

Image Source – South China Morning Post