"An uncertain policy environment is not conducive to investment and the steady escalation of trade tensions will continue to weigh on sentiment, leading to further retrenchment of capital expenditure and weaker growth," it said in the latest global macroeconomics sector comment.
The incremental but continuing escalation of the US-China trade dispute is already adversely affecting economic activity in the United States, China and the rest of the world.
"We continue to believe that at the macroeconomic level, the direct exposure of the United States and China to a full-blown trade war is moderate. However, indirect channels are powerful, their effects on confidence and investment are already becoming evident, and
further deterioration could potentially serve as a catalyst for a severe downturn," said Moody's.
Trade relations between Washington and Beijing soured further on August 23 after Beijing announced new retaliatory tariffs on imports from the United States, quickly followed by the White House announcing it will increase tariff rates on more than 500 billion dollars of imports from China.
Notwithstanding conciliatory remarks on August 26 indicating that trade negotiations may resume, the two sides are headed toward further escalation. "As a result, we expect the steadily worsening trade friction between the world's two largest economies to leave a lasting impact on the global economy," said Moody's.
Under the new restrictions, China will implement tariffs on more than 25 billion dollars of imports from the United States on September 1. Chinese tariffs on an additional 40 billion dollars of US goods will take effect on December 15.
In response, the US administration will increase tariff rates on more than 500 billion dollars of imports from China by 5 per cent. The United States will raise tariffs to 15 per cent in two stages, affecting 110 billion dollars of Chinese imports on September 1 and another 160 billion dollars of imports on December 15.
Tariffs will increase to 30 per cent on 250 billion dollars of other Chinese imports on October 1.