Many of the world’s leading economies will fall into recession within the next 12 months as central banks move to aggressively tighten monetary policy to combat rising inflation, according to chief economist at brokerage firm Nomura Holdings.
“Right now a lot of them have essentially switched to a single mandate – and that is supposed to bring down inflation. The credibility of monetary policy is too valuable to lose. So they’re going to be very aggressive,” said Rob Subbaraman, also head of global market research, Asia ex-Japan, told CNBC’s Street Signs Asia on Tuesday.
“That means rate hikes from the start. We have been warning about the risks of a recession for several months and bit the bullet. And now we have many of the developed economies actually going into recession,” he added.
In addition to the US, Nomura expects recessions in the euro zone, the UK, Japan, South Korea, Australia and Canada next year, the brokerage firm said in a research note.
Central banks around the world have held on to “super easy monetary policy” for too long in hopes that inflation would be temporary, Subbaraman said. Now governments need to catch up and try to regain control of the inflation narrative, he told CNBC.
“Another thing I would like to point out, when many economies are declining, you cannot rely on exports for growth. That’s another reason why we believe this recession risk is very real and likely to materialize,” Subbaraman said.
US recession: shallow but long
In the US, Nomura forecasts a shallow but long five-quarter recession beginning in the final quarter of 2022.
Thomas Calomiris, a third generation produce vendor, weighs an onion at Eastern Market as the U.S. grapples with rising inflation May 20, 2022 in Washington, DC.
Brendan Smialowski | AFP | Getty Images
“The US will go into recession – that is, negative quarter-on-quarter GDP growth starting in the fourth quarter of this year. It will be a shallow recession, but a long one. We have it going for five consecutive quarters,” Subbaraman said.
The US Federal Reserve and European Central Bank are among those trying to manipulate record inflation with interest rate hikes.
The Fed raised its interest rate by 75 basis points in June to a range of 1.5% to 1.75% and Chair Jerome Powell has indicated there could be another hike of 50 or 75 basis points in July.
“The Fed will tighten in this recession and that’s because we view inflation as sticky – it’s going to stay elevated. It’s going to be hard to get them down,” Subbaraman noted.
“We have the Fed hiking 75 [basis points] in July and then 50 at the next meeting,” said the economist, outlining Nomura’s predictions. “Then a row of 25 [basis points] until it brings the Fed’s benchmark rate to 3.75% by February next year.”
Risks for medium-sized economies
In the research note, Nomura highlighted several mid-market economies — including Australia, Canada and South Korea — that have had debt-fueled real estate booms. They face the risk of deeper-than-forecast recessions as rate hikes trigger housing crises and deleveraging, the report said.
“The nerd is China, which is recovering from recession as the economy unfolds amid accommodative policies, though it risks suffering renewed lockdowns and another recession as long as Beijing sticks to its zero-Covid strategy,” it said it in the note.
“Unless central banks tighten monetary policy to bring inflation down now, the pain for the economy to go into a hyperinflationary regime” and get stuck there is far greater, Subbaraman warned.
It will lead to wage-price spirals that will be “even more painful for the economy and for the man and woman on the street in the long run,” he added.
“It’s hard to put it nicely…it’s better for the global economy and society to anticipate this pain and bring inflation down than actually let inflation spiral out of control, as we learned in the 1970s.” “