Business confidence has fallen across the G7 to its lowest level in five years (Chart 6a) with sentiment among manufacturers particularly weak. Households have also become gloomier about the general economic outlook, though they remain relatively upbeat about their own financial situation (Chart 6b), likely reflecting robust labour markets. This is a similar pattern to that which emerged in the UK following the referendum. In mid-May, the US placed Chinese company Huawei on its ‘entity list’, in effect banning US companies from selling to it without US government. China retaliated, publishing its own list of unreliable entities at the end of that month. 3 Trade in intermediate goods and services doubled between 1989 and 2014 and the value added of imports as a share of exports rose from 10% in 1990 to around 20% in 2015. See Auer, R, Borio, C and Filardo, A (2017), ‘The globalisation of inflation: the growing importance of global value chains’, BIS Working Paper No. 602. 2  4  All speeches are available online at www.bankofengland.co.uk/news/speeches  4  Chart 3: Investors now see a trade war as the top tail risk June 2019 March 2019  Trade war  Monetary policy impotence US politics China slowdown A credit event Market structure Equity market bubble European elections Brexit 0  10  20 30 40 Percentage of respondents  50  60  Sources: Bank of America Merrill Lynch Global Fund Manager Survey.
6  All speeches are available online at www.bankofengland.co.uk/news/speeches  6  Chart 6b: But households still optimistic about their own prospects Differences from averages since 1985 (number of standard deviations) 1.4 1.2 General economic situation expectations  1.0 0.8 0.6 0.4 0.2 0.0 -0.2 Personal financial situation expectations  -0.4 -0.6  Jan. 16  Jul. 16  Jan. 17  Jul. 17  Jan. 18  Jul. 18  Jan. 19  Sources: European Commission, University of Michigan consumer sentiment index, and Bank calculations. Notes: The chart shows the median across the G7 euro area countries (France, Germany and Italy) and the US. Reconciling market moves with global developments All in all, the risks to the global economy have shifted to the downside. But to what extent? Does the sea change in financial markets presage a sea change in the global economic outlook? And what does the UK experience suggest? A lot will rest on the scale and breadth of the trade effects. Traditional trade models suggest that the direct effects of the tariff measures implemented so far4 are likely to be small. The Bank estimates that these measures will reduce global GDP by only around 0.1%, and the further US-China tariffs that took effect in May and June will roughly double that effect (Table 1).5 But that may not be the end of the story.