Thomas Calomiris, a third generation produce vendor, weighs an onion at Eastern Market as the US struggles with rising inflation May 20, 2022, in Washington, DC.
Brendan Smialowski | AFP | Getty Images
Many of the world’s leading economies will fall into a recession within the next 12 months as central banks move to aggressively tighten monetary policy to fight surging inflation, according to the chief economist at brokerage firm Nomura holdings.
“Right now central banks, many of them have shifted to essentially a single mandate — and that’s to get inflation down. Monetary policy credibility is too precious an asset to lose. So they’re going to be very aggressive,” Rob Subbaraman, who is also head of global markets research, Asia ex-Japan, told CNBC’s “Street Signs Asia” on Tuesday.
“That means front loading rate hikes. We have been pointing for several months about the risks of a recession and we’ve asked the bullet. And now we have many of the developed economies actually falling 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.
The central banks around the world kept “super loose monetary policy” in place for too long, hoping that inflation would be transitory, Subbaraman said. Now governments have to play catch up and try to regain control of the inflation narrative, he told CNBC.
“One other thing I point out when you have many economies weakening, you can’t rely on exports for growth. That’s another reason why we think this recession risk is very real and will likely happen,” Subbaraman said.
US recession: shallow but long
In the US, Nomura forecasts a shallow but long recession of five quarters starting from the final quarter of 2022.
“The US will fall into recession — so negative quarter-on-quarter GDP growth starting in Q4 this year. It is going to be a shallow recession but a long one. We have it lasting for five quarters in a row,” Subbaraman said .
The US Federal Reserve and the European Central Bank are among those seeking to tamper record inflation with rate hikes.
The Fed increased its benchmark interest rate by 75 basis points to a range of 1.5%-1.75% in June, and Chair Jerome Powell has indicated there could be another hike of 50 or 75 basis points in July.
“The Fed will be tightening into this recession and that’s because we see inflation as being sticky — it’s going to stay high. It’s going to be hard to get down,” Subbaraman noted.
“We have the Fed hiking 75 [basis points] in July and then 50 at the next meeting,” the economist said, outlining Nomura’s predictions. “Then a series of 25 [basis points] until it gets the Fed funds rate at 3.75% by February next year.”
Risks facing mid-sized economies
In the research note, Nomura underlined several mid-sized economies — including Australia, Canada and South Korea — that have had debt-fueled housing booms. They are at risk of deeper-than-forecast recessions if interest rate hikes trigger housing busts and deleveraging, the report said.
“The odd one out is China, which is recovering from recession as the economy unlocks amid accommodative policies, though it is at risk of renewed lockdowns and another recession, so long as Beijing sticks to its zero-Covid strategy,” the note said.
“If central banks do not tighten monetary policy to get inflation down now, the pain to the economy of moving to a high inflation regime” and getting stuck there is far greater, warned Subbaraman.
It will lead to wage price spirals, which would be “even more painful for the economy and for the man and woman on the street in the longer run,” he added.
“It’s hard to say this nicely… getting that pain up front and getting inflation down is better for the world economy and society than actually letting inflation get out of control as we learned in the 1970s.”