‘A storm is brewing’ in the US economy, says economist Diane Swonk

Even if there isn’t a full-blown trade war, the uncertainty surrounding tariffs can hurt the U.S. economy, economist Diane Swonk told CNBC on Tuesday.

The tariffs, along with a strengthening dollar and rising rates, all undermine the competitiveness of manufacturers and other exporters, she said in an interview with “Closing Bell.”

“The U.S. economy has a bit of a cushion, and we can weather the storm for a bit. But the storm is still brewing and the undercurrents are clearly forming,” said Swonk, chief economist at Grant Thornton.

Trade tensions have been rising between the U.S. and the rest of the world.

China has been President Donald Trump’s frequent target. Last week, the president told CNBC he is “ready” to put tariffs on all $505 billion of Chinese goods imported to the United States.

Washington has already slapped tariffs on $34 billion of Chinese products. Beijing hit back with retaliatory tariffs on the same amount of U.S. goods.

The Trump administration has also placed tariffs on steel and aluminum imports from several nations, including key allies such as Canada, Mexico and the European Union.

Swonk said while the tariffs implemented so far are not that big, the threat of tariffs undermines confidence.

“If we were to have a full-out trade war tomorrow, which I don’t think we’re going to have, then you could see a recession in 2019 and that would be fairly substantial,” she said.

“If we are to continue to have this uncertainty then you have over time a corrosive effect that builds up in 2019 with less investment,” she added.

In fact, Swonk believes Brexit provides a cautionary tale.

While the U.K. has yet to officially break from the European Union, the threat alone over the last two years has produced higher inflation, slower growth and reduced investment and confidence, she said.

When it comes to the stock market, Venu Krishna, deputy head of U.S. equity research at Barclays, expects tariffs to have a broad, negative impact.

In fact, he said small-cap companies will be harmed the most, contrary to the popular belief that they are better protected because they are domestic.

“These companies, in fact, have a higher export and import exposure. Their margins are significantly weaker and hence they cannot absorb cost. And lastly, they don’t have the pricing power,” he told “Power Lunch.”

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