Donald Trump's tariffs policy is causing turmoil in financial markets.
Part of the reason share and bonds markets are whipsawing from one extreme to the other relates to ongoing questions, and fears, over whether the United States is heading towards a recession.
Australian National University economist Warwick McKibbin has travelled to Washington to conduct modelling for the Peterson Institute for International Economics on what impact the trade tariffs will have on the world.
"The big problem is what this does to confidence and uncertainty," he said.
"And the new scenarios we're doing as we speak is to look at what happens if people change their perceptions about risk, either in the US economy or more generally across the globe.
"And that can lead to what we saw, for example, during the global financial crisis 2009, 2010.
"So it's very, very dependent on how people's expectations change and how people's confidence changes," Professor McKibbin told ABC Radio program AM.
Warning from China
Deutsche Bank Australia chief economist Phil O'Donaghoe said data on that was already beginning to filter through in the US.
"We've already seen soft data looking very troublesome," he said.
"Here I'm talking about sentiment measures specifically — consumer sentiment and inflation expectations."
US president Donald Trump announced sweeping tariffs on so-called "liberation day" last Wednesday.
Since then, there have been tit-for-tat trade announcements from various countries, including China.
China on Tuesday warned of "countermeasures" if the United States went ahead with the latest tariff threat, vowing to "fight to the end".
It is this kind of extreme language, economists say, that risks tipping the global economy into recession.
Unless these tariff measures were reversed, Mr O'Donaghoe said, the US economy was heading toward a recession.
"My US economist is talking about a material impact on US growth," he said.
"What we are waiting to see now is how those sentiment measures manifest in the hard data.
"So measurements of actual retail spending, consumer spending, broader investment activity."
Global investment bank JP Morgan is also now "assuming" the US will enter a recession.
What it means for Australia
Mr O'Donaghoe said Australia would be hurt if the economy of China, the nation's largest trading partner, was damaged by the trade war.
"We will expect to see investment, labour market decisions, consumer decisions — in the absence of aggressive easing by the RBA — I think we're going to see those things impacted pretty heavily into the second half of this year," he said.
By labour market decisions, Mr O'Donaghoe was talking about hiring and firing decisions, and rising unemployment.
He warned the Australian economy risked slipping into a recession without "aggressive" Reserve Bank interest rate cuts.
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AMP's Shane Oliver sees a "severe" global recession under a worst-case scenario US tariff policy.
This, he said, would drag down Australia's economic growth too.
"For an absolute worst case, which would mean continued tit-for-tat tariff escalation, we would probably be sucked into recession," Dr Oliver said.
"For a realistic worst case though, I would say it's now about 35 per cent risk of recession for Australia."
Treasurer Jim Chalmers has already raised the prospect of a super-sized interest rate cut from the Reserve Bank.
"Markets are now expecting around four interest rate cuts in Australia this calendar year," he said.
"There's even a more than even money expectation in the markets — more than 50 per cent expectation — that the next Reserve Bank interest rate cut in May might be as big as 50 basis points."
Fifty basis points is the same as a half a percentage point cut to the Reserve Bank cash rate, which in turn influences the variable interest rates offered by the commercial banks.
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Opposition leader Peter Dutton jumped on the treasurer's comments on Tuesday.
"Now the treasurer is out there talking about a 50 point reduction in interest rates, which means obviously that he sees a recession coming for our economy," Mr Dutton said.
"He wouldn't be talking about 50 points as a reduction next month if he didn't believe there was going to be a significant souring of the Australian economy on his watch."
Don't panic
A recession is generally defined as six months of contracting gross domestic product (GDP).
But Professor McKibbin believes Australia will avoid an economic contraction.
"I wouldn't panic. Again, this is an attempt to restructure the global financial system," he said.
"Australia itself doesn't depend that much on the US economy.
"We export agriculture and mining and other products, but most of our future growth is actually in the Asian region."
The latest federal budget papers highlighted the government's reluctance to expand fiscal policy.
But Mr O'Donaghoe said the government was well placed to manage an economic downturn.
"If we get a pull back on the price of iron ore then that might have an impact on the fiscal position," he said.
"For sure it would mean wider deficits for Australia.
"But even then we're coming from a position of low levels of government debt, AAA rated. We're in a pretty good position.
"We can weather a softer Chinese economy I think," Mr O'Donaghoe said.
