Photo by John Schreiber.

California’s economy is expected to continue its upward trend over the next three years, but the possibility of an all-out trade war with China is a looming threat that could dramatically affect the state in the long run, according to a UCLA economic forecast released Wednesday.

In his quarterly forecast for the state, UCLA Anderson Forecast Director Jerry Nickelsburg wrote that the tough talk on trade coming from the White House “has been mostly rhetoric” thus far, along with some “mutually advantageous” adjustments of existing trade agreements with countries other than China.

But he said the “standing-ground” and “tit-for-tat” policy regarding China presents a looming economic threat, noting that “a re-allocation of resources away from Chinese imports through the Golden State’s ports” would lead to a less optimistic view of the state’s economic fortunes.

“The risk to NAFTA has abated as we predicted,” Nickelsburg wrote. “The modifications in the agreement with Mexico will have little effect on the U.S. and on (California). Our expectation is for the same to be true with the negotiations with Canada. The risk with a trade war with China is much greater and were that to come to pass, the logistics industry — one of the fastest growing sectors in California over the last year — will be very real.

“Additionally, the state budget has been expanding with increased tax revenues, but this presents a risk in any downturn,” he wrote.

Nickelsburg predicted total employment growth in the state of 1.2 percent this year, followed by 1.5 percent growth next year and 0.5 percent in 2020.

On the national front, UCLA Anderson senior economist David Shulman warned that the country is in line for a sharp slowdown by 2020.

“Over the near term, the economy remains on a broad-based strong 3-percent growth track, but that will slow to 2 percent in 2019 and a near-recession 1 percent in 2020,” Shulman wrote in his report.

He noted that the current economy is being powered largely by the recently enacted tax cut and increases in spending, but that momentum is likely to run out in 2020.

“The slowdown will be caused by the natural constraints of a fully employed economy with a 3.5 percent unemployment rate next year, and a waning of the administration’s stimulus policies,” Shulman wrote.

“… The major near-term risk to our forecast remains the administration’s trade policies that are both inflationary and output-restricting with yet-unknown effects on business investment,” he wrote.

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