An escalating trade war may drag the US economy into recession and interest rate cuts might come too late to save the country, analysts at Morgan Stanley said, according to a report by CNBC.

Share Market Live

NSE

A team led by the company's chief US economist Ellen Zentner told Morgan Stanley clients in a lengthy analysis that the path to the bear case of a US recession is narrow but not unrealistic, the report said.

According to the report, Zentner said that the current "credible bear case" probability is about 20 percent but that can change quickly.

“If trade tensions escalate further, our economists see the direct impact of tariffs interacting with the indirect effects of tighter financial conditions and other spillovers, potentially leading consumers to retrench,” wrote Zentner, as mentioned in the report.

“Corporates may start laying off workers and cutting capex as margins are hit further and uncertainty rises,” she added.

This could lead to a "large demand shock" taking the growth from a projected 2.2 percent in 2019 to a negative 0.1 percent in 2020, the report said, adding it may look like a shallow recession but is a "substantial retreat" for the economy that grew 2.9 percent in 2018.

This could further mean a significant hit to stocks. As per the analysis, the best bets would be defensive sectors like health care and consumer staples while autos and tech hardware will most likely underperform, the report added.

First Published:Jul 23, 2019 11:38 AM IST