World growth has already slowed and further weakness would reinforce the reluctance at the Federal Reserve and fellow central banks to raise interest rates, and perhaps even force them into fresh stimulus. Morgan Stanley, which still expects a U.S.-China deal, is warning of a global recession — growth below 2.5% by 2020 — if the two sides remain at odds.

“Just as tentative signs appeared that a recovery is taking hold, trade tensions have re-emerged as a credible and significant threat to the business cycle,” Chetan Ahya, chief economist at the bank, said in a report. He highlighted a “serious impact on corporate confidence” from the tariff slug fest.

Reasons for concern were evident Wednesday, with China reporting that industrial output, retail sales and investment all slowed in April by more than economists forecast. In the U.S., retail sales unexpectedly declined in April while factory production fell for the third time in four months.

Although Germany’s economy emerged from stagnation to grow by 0.4% in the first quarter, the outlook remains fragile amid a manufacturing slump that will be challenged anew by the trade war. Investor confidence in Europe’s largest economy unexpectedly weakened this month for the first time since October.

IMF Forecast

Such softness even before the conflict between the U.S. and China reached new lows reinforces the concerns. Warnings about the fallout from protectionism were already behind the International Monetary Fund’s April forecast for global growth this year to be the weakest since the financial crisis.

The Organization for Economic Cooperation and Development’s Composite Leading Indicator, designed to anticipate turning points six to nine months before they happen, fell for a 12th straight month in March, hitting its lowest level since 2009.

In a new study, Bloomberg Economics calculated about 1% of global economic activity is at stake in goods and services traded between the two countries. Almost 4% of Chinese output is exported to the U.S. and any hit to its manufacturers would reverberate through regional supply chains with Taiwan and South Korea among those at risk.

U.S. shipments to China are more limited, though 5.1% of its agricultural production heads there as does 3.3% of its manufactured goods.

What Bloomberg’s Economists Say

“Higher tariffs would mean lower margins for producers and higher prices for consumers and, in turn, reduced demand. This would create widespread disruption along the supply chain.”

— Maeva Cousin, economist
Click here for the full report.

To be sure, many economists are still betting that the U.S. and China will eventually strike a deal, perhaps at the Group of 20 summit at the end of June, when Trump and Xi are expected to meet. But they acknowledge that they’ve been surprised by the latest flare-up in tensions and say the odds of a breakdown have risen.

A trade war would compound an existing softening in global growth, and add to a mix of issues, such as a cooling technology boom and weaker demand for cars, particularly in China. For companies, it means visibility about the broader global backdrop is low.

U.S. chip giant Intel Corp. is taking a “more cautious view of the year,” and Italian drinks maker Davide Campari-Milano SpA this month noted the “uncertain geopolitical and macro economic environment.”

“The world economy has been in a significant slowdown for a period,’’ said James Bevan, chief investment officer at CCLA Investment Management. “People just have to wake up and look at the trade data.’’

For central banks, the darkening outlook will likely propel them deeper into dovish territory after the Fed led the way in indicating it will keep rates on hold for a while.

In a worst-case scenario in which tensions persist for another three months and more tariffs are imposed, Morgan Stanley’s economists reckon China would ease fiscal policy by the equivalent of 0.5 percentage point of gross domestic product and try to boost credit growth. As for the Fed, it would cut its benchmark by an initial 50 basis points, they said.

“If the tariff battle escalates, it’s going to be a fairly meaningful drag on the global economy and threaten the life of the expansion,” said JPMorgan Chase & Co. global economist Joseph Lupton.