ISTANBUL
US President Donald Trump's tariff policies and retaliatory steps have escalated tensions in global trade, while US markets deepened their losses amid fears of recession.
As the inflation-recession dilemma persists across the globe, concerns over the impact of Trump's protectionist trade policies on the economic outlook remain at the center of investors' agenda.
In an interview Sunday, Trump did not rule out the possibility that tariffs on Canada and Mexico could cause the US economy to enter a recession or increase inflation this year.
Asked whether a recession was expected this year because of the tariffs, he said he “hates” making predictions on such matters, adding: “There is a period of transition, because what we’re doing is very big. We’re bringing wealth back to America. That’s a big thing. And there are always periods of -- it takes a little time. It takes a little time. But I think it should be great for us."
Regarding whether the tariffs will fuel inflation, Trump emphasized that it may affect inflation, but interest rates have also fallen.
Trump's remarks at the weekend fueled concerns that rising trade tensions with tariffs could trigger an economic slowdown.
On the other hand, as retaliatory statements against the US tariffs continued. Doug Ford, the premier of Ontario, Canada's most populous province, said they will impose a 25% surcharge on the electricity they supply to US states in response to Washington's tariffs.
Ford said that if the US escalates this, he will not hesitate to cut off the electricity completely, arguing that Trump is responsible for this trade war.
While developments regarding Trump's tariff policy continue to affect the direction of the markets, a 25% tariff on all steel and aluminum imports is expected to take effect on March 12.
- Consumers more pessimistic
On the macroeconomic data side, signals from employment data released last week supported risks to growth in the US.
Short-term inflation expectations in the US rose by 0.1 percentage points, a survey conducted by the New York Fed showed Monday.
The New York Fed also reported that US households were more pessimistic about their financial situation for the next year in February.
Economists have raised their recession forecasts for the US economy in recent days, pointing to an increasingly pessimistic outlook.
- Big fall in stocks
With these developments, the VIX Index, also known as the “fear index,” increased by more than 19% to 27.8.
The US 10-year bond yield fell to 4.22%, while the dollar index rose 0.10% to 103.9.
The Dow Jones industrial average fell 2.08%, or 890.01 points, to end Monday at 41,911.71.
The S&P 500 went down 2.7%, or 155.64 points, to 5,614.56; losing about 7% compared to its peak on Feb. 19.
The Nasdaq Composite saw the highest loss on Monday, falling 4%, or 727.9 points, to 17,468.32. The index lost more than 13% from its highest level on Dec. 16, 2024.
While the leading technology companies in the US also suffered losses in their shares, about $2 trillion were wiped out from the markets.
- 'No Monday crash here'
Padhraic Garvey, the regional head of research in ING, said severe risk-off and elevated volatility characterized a rough day for US markets.
"No Monday crash here, but certainly a slow-grind move south, extending from preliminary weakness last week," he stressed. "Only one way to go for US Treasuries on the back of this -- the 10-year has homed in on the 4.2% area.
For the 10-year yield to get and stay through 4%, there would need to be an even deeper rate cut discount, one that verges on outright recession, he said. "We're not quite on that wavelength yet, but watching it carefully."
- Tariffs to spark global trade war
Mark Zandi, chief economist from Moody's Analytics, said the risks of a US recession starting in the coming year are uncomfortably high and rising.
"I would put them at 35%, up from 15% at the start of the year. For context, the typical recession probability is 15% -- the US economy historically suffers a recession every 6 or 7 years on average," he stressed.
The economy will likely suffer a downturn if the Trump administration follows through on the tariff increases it has announced and maintains those tariffs for more than a few months, he added.
Zandi said the tariffs will spark a global trade war, with US trading partners imposing their own tariffs and non-tariff barriers on US products.
Stock prices will also continue to slide, weighing on the wealth and spending of well-to-do Americans, which is driving much of the economy’s current growth, he stressed.
"Of course, the haphazard DOGE )Department of Government Efficiency) cuts to government jobs and funding and uncertainty over a government shutdown and the Treasury debt limit, which will come to the fore in coming weeks, are also weighing on the economy," he said.
"Needless to say, a weak or recessionary economy will also exacerbate the nation’s fiscal problems as it will hit tax revenues and automatically push up government spending on unemployment insurance and other income support programs,” he added.
- Economy fine but may ‘deteriorate quickly'
Olu Sonola, head of US Economic Research at Fitch Ratings, said his institution doesn’t have a recession in its forecast over the near term, but it is safe to say that the risk of a recession is a tad bit higher than it was a month ago or two.
"If the market downturn continues unabated, and trade tensions continue at a dizzying pace, consumers and businesses are likely to take notice," he said. "Heightened uncertainty may encourage consumers to increase savings and pull back spending. Businesses may also pull back on capital expenditures and typically a severe downturn in business spending can trigger a recession."
Sonula said the economy is fine for now, but economic conditions could deteriorate quickly if a full-blown global trade war ensues.
