By Siddarth S
Feb 3 (Reuters) - Major brokerages including J.P.Morgan warned that the economies of Canada and Mexico could enter a recession if U.S. President Donald Trump's new trade tariffs against them were sustained, pressuring their currencies as well as domestic inflation.
Trump ordered 25% tariffs on Mexican and most Canadian imports and 10% on goods from China on Saturday, kicking off a trade war that could dent global growth and cause an uptick in inflation.
If the 25% tariffs are sustained, J.P.Morgan forecast that Mexico and Canada would face economic recession, while Morgan Stanley and Societe Generale forecast a similar outcome for Mexico.
"A recession in Mexico becomes the base case," Morgan Stanley economists said in a note dated Feb. 2.
Mexico and Canada, the top two U.S. trading partners, immediately vowed retaliatory tariffs, while China said it would challenge Trump's levies at the World Trade Organization as well as take other "countermeasures".
"The size of a sustained 25% tariff hike will be large enough to throw the Mexican and Canadian economies into recession, and this outcome will be our inclination if these policies are maintained for six months," JPM economists said.
About 77% of Canadian exports, amounting to 24% of the country's GDP, go to the U.S., while the equivalent numbers for Mexico are more than 80% of exports - or a quarter of its economy - according to Morgan Stanley estimates.
Morgan Stanley forecast that prolonged 25% tariffs, with reciprocal tariffs from Canada, would shave off between 2.3 and 2.8 percentage points from Canada's GDP growth.
On the FX front, Canada's loonie CAD= could fall to 1.50 per U.S. dollar, while the Mexican peso MXN= could depreciate about 10%, Morgan Stanley estimated.
Separately, Citigroup said "the magnitude of the impact on Mexico’s economy will be dependent on the persistence of the tariff, the currency reaction (which could mitigate the effect) and the uncertainty from the future of the U.S.-Mexico trade policy which could limit investment outlook".
The Latin American country's GDP would shrink by 0.7% against the backdrop of persistent tariffs and a 10% depreciation in the peso, according to Citi's forecast.
(Reporting by Siddarth S in Bengaluru; Editing by Pooja Desai)
((Siddarth.s@thomsonreuters.com;))
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