The world's most accurate economic forecaster sees a 'prolonged global slowdown' on the horizon - and warns it can only be narrowly avoided

• As investors await the outcome of trade negotiations this month, the world's most accurate economic forecaster says the risks are tilted towards "a prolonged global slowdown."
• Christophe Barraud, a strategist and chief economist at Market Securities, compiled the evidence that global trade is already in its own recession, explained why a swift recovery is unlikely.
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The US-China trade war that has raged for nearly two years has impacted the set of opportunities and risks in virtually every asset class.

Investors might need to stay seated and buckled up for a while longer if Christophe Barraud's forecast is correct. Barraud is a strategist and chief economist at the broker dealer Market Securities.

Before dismissing him as just another financial pundit, you should know that he was the most accurate forecaster of US economic data for seven straight years through 2018, according to Bloomberg's annual rankings. His expectations for the Euro economy have been the closest to reality from 2015 through 2018, and he was the most accurate on China in 2017 and 2018.

Barraud's forecasting prowess came to bear again in January, when he opined that the consensus was too bullish on the prospects for a trade resolution in particular and global growth in general.

Since then, trade between the US and China countries has been in freefall - to the extent that the quarterly contractions since Q4 2018 have put trade in its own mini-recession, according to Barraud.

This damage has not been confined to the arena of cross-border relations.

Last week, investors got two fresh pieces of bad news confirming this spillover that Barraud has been warning about. First came the Institute of Supply Management's manufacturing index, which dropped to 47.8, the metric's lowest since June 2009. ISM then released its report on the larger and more important services sector, which expanded at its slowest pace in three years.

Companies in both sectors pinned the slowdown in activity on the trade conflict.

A cursory look at overall trade activity between the US and China - illustrated in the charts below - shows why companies are under strain. Since both countries are trading fewer goods with each other, executives are faced with higher costs, and have to find alternative ways to maintain profit margins.

As investors anticipate a fresh round of US-China negotiations this month, the risks are skewed towards "a prolonged global slowdown," Barraud said in a recent note.

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He's of this view because of the potential damage that the next round of tariffs would inflict.

On October 15, the Trump administration plans to raise the tariff rate on $250 billion worth of Chinese products from 25% from 30%. Then on Dec. 15, the US will impose a 15% tariff on nearly all imports - and they will hit a broad swath of consumer-facing products like cellphones, smartwatches, and Christmas ornaments.

On top of all this, Barraud notes that businesses may put their capital spending plans on hold next year while they await the outcome of the US elections and what it means for them. They would also be grappling with a fading tax-cut boost in the new year.

Even if the Trump administration reached a partial deal, it won't resolve the long-term structural conflict between the US and China - especially if it scores another election victory, Barraud said.

All these risks have solidified investors' expectations that the Federal Reserve will cut interest rates this month and afterwards if necessary, providing a key lifeline for the record-long bull market.

However, the Fed can only do so much if the economic fundamentals continue to deteriorate. And this is why you shouldn't let the specter of a prolonged slowdown catch you off guard.