While U.S. economic growth climbs to pre-financial crisis rates, some economists remain concerned that heightened global trade tensions could translate into an all out recession. Such a decline could significantly shake the markets as consumer and business confidence rests near record highs and the U.S. unemployment rate remains at a generational low, according to an economist at Bank of America Merrill Lynch. (See also: Sell-Off Signals a ‘Major Correction’: Jim Mellon.)

On Friday, President Donald Trump doubled down on his protectionist rhetoric, proposing a new round of harsher tit-for-tat tariffs targeted at China and the European Union. Bears have warned that such policies could spur retaliatory levies, hurting U.S. consumers and businesses, while triggering inflation and dragging on global growth. 

BofAML analyst Michelle Meyer wrote a note indicating that a major global trade war would lead to a "significant reduction in growth." A resulting drop in confidence, coupled with supply chain disruptions, could work to heighten the damage, potentially leading to an outright recession. While she wrote that the bank views the probability of "full blown trade war" as low, she noted that "the risks are rising" and that the possibility remains "a key uncertainty" in the firm's outlook.

Risks of Trade War Low, But Rising 

On the same day that BofAML issued the note, Trump threatened to slap a 20% tariff on European auto imports in an effort to pressure the allied countries to pull back on duties it imposes on American cars. The new threat comes alongside a presidential directive to the U.S. trade representative to find another $200 billion of Chinese goods for tariffs following a previous list of $50 billion. 

As the Federal Reserve Bank is projecting U.S. Gross Domestic Product (GDP) to expand 2.8% for 2018, 2.4% in 2019 and 2% in 2020, settling into a 1.8% long-run rate, Meyer writes that a baseline trade-war scenario would eat into just 0.3% to 0.4% of GDP in the first year and then 0.5% to 0.6% in the second year. While not recessionary, the scenario would suggest that, "the boost to growth expected from fiscal stimulus (e.g. tax cuts and greater federal government spending) will essentially be offset by the negative trade shock." A resultant hit to confidence and an industrial production slowdown, however, could threaten growth by a much larger degree, according to BofAML. 

Earlier this month, the World Bank issued a report warning that "an escalation of tariffs up to legally-allowed bound rates could translate into a decline in global trade flows amounting to 9 percent, similar to the drop seen during the global financial crisis in 2008-09." (See also: Earnings Surge Alone Is Not Enough: Goldman Sachs.)

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.