Mubasher: The US Federal Reserve could cut interest rates to zero within a year, as the global economy was heading for a recession, after the breakdown of the trade talks between Washington and Beijing and tariff hikes on Chinese goods, Reuters said, citing a Morgan Stanley note.

A global economic recession is a growth falling well below the 2.5%-per-year benchmark.

While a temporary escalation of trade disputes could do little damage, a lasting collapse would bring about dire consequences.

“If talks stall, no deal is agreed upon and the US imposes 25% tariffs on the remaining circa $300 billion of imports from China, we see the global economy heading towards recession,” the bank’s note was quoted by Reuters.

Accordingly, the Fed could cut interest rates all the way back to zero by the spring 2020, while China could step up its fiscal stimulus to 3.5% of gross domestic product (GDP), an equivalent to around $500 billion, Morgan Stanley analysts said.

Meanwhile, its broad credit growth target will be raised to a range between 14% and 15% per annum, they added.

The US bank’s middle scenario supposes that 25% levies on $200 billion in Chinese goods remain in effect for between three to four months. In that case, global growth could lose momentum by nearly 50 basis points (bps) to 2.7% per year.

In response, the US central bank would slash interest rates by 50 bps to absorb the blow, while the Chinese government would boost its total fiscal expansion to 2.25% of GDP, an equivalent to $320 billion.