As an after affect of the US-China trade war, the global economy could go into a recession within a year, says Morgan Stanley.

The trade dispute can drag on for longer. In particular, investors are not fully appreciating the effect of reduced capital expenditures, which could drive down global demand. Even though policymakers are likely to act to stem the effects of a trade war, given the customary lag before policy measures impact real economic activity, a downdraft in global growth appears inevitable. Markets have tanked amid the trade uncertainty. The hit to equities was compounded last week by American threat of new tariffs on Mexico if it does not take new action to prevent unlawful immigration into the US. The US will impose escalating tariffs on Mexican imports starting at five per cent on June 10. The world’s two largest economies are trading rhetorical barbs and punishing tit-for-tat economic measures. China has accused the US of starting the trade war and of being an unreliable negotiating partner.

The US while raising tariffs last month on $200 billion worth of Chinese goods from 10 to 25 per cent has also threatened to impose tariffs on additional Chinese imports worth $300 billion.