Thomas Calomiris, a third-generation product seller, weighs an onion in the eastern market as the United States struggles with rising inflation on May 20, 2022, in Washington, DC.
Brendan Smilofsky | AFP | Getty Images
Many of the world’s leading economies will fall into recession over the next 12 months as central banks move aggressively to tighten monetary policy to fight rising inflation, according to chief economist at brokerage Nomura Holdings.
“Right now, many central banks have basically switched to one mandate – and that is to cut inflation. The credibility of monetary policy is a valuable asset that cannot be lost. So they will be very aggressive,” said Rob Subaraman, who is also head of global markets research, Formerly Asia and Japan, in an interview with CNBC’s “Street Signs Asia” on Tuesday.
“This means raising front-load rates. For several months now we have been reporting recession risks and we have bitten the bullet. Now we have many advanced economies already in recession,” he added.
In addition to the United States, Nomura expects recessions in the eurozone, the United Kingdom, Japan, South Korea, Australia and Canada next year, the brokerage said in a research note.
Subbaraman said central banks around the world have kept “ultra-loose monetary policy” in place for too long, hoping that inflation will be temporary. Now governments have to play catch-up and try to regain control of the inflation story, he told CNBC.
“Another thing to point out is when you have many economies weakening, you can’t rely on exports for growth. And that’s another reason why we think these recession risks are very real and likely to happen,” Subaraman said.
US recession: shallow but long
In the United States, Nomura forecasts a shallow but prolonged recession for five quarters starting in the last quarter of 2022.
“The US will fall into a recession – negative GDP growth on a quarterly basis starting in the fourth quarter of this year,” said Subaraman. “It will be a shallow but long recession. The recession has lasted for five consecutive quarters.” .
The Fed raised its benchmark interest rate by 75 basis points to a range of 1.5%-1.75% in June, and Chairman Jerome Powell indicated there could be another increase of 50 or 75 basis points in July.
“The Fed is going to clamp down on this recession and that’s because we see inflation as steady – it’s going to stay high. It’s going to be hard to come down,” Subaraman noted.
“We have raised the Fed 75 [basis points] In July and then 50 at the next meeting, the economist said, explaining Nomura’s forecast. Then a series of 25 [basis points] Until he gets the fed funds rate at 3.75% by February next year.”
In the research note, Nomura emphasized several medium-sized economies – including Australia, Canada and South Korea – that have experienced debt-induced housing booms. The report said they are at risk of a deeper-than-expected recession if higher interest rates cause a housing collapse and reduce indebtedness.
“The strange thing is China, which is recovering from recession as the economy opens amid accommodative policies, although it is at risk of a renewed lockdown and recession again, as long as Beijing sticks to its zero-sum strategy,” the note said.
Subaraman warned that “if central banks do not tighten monetary policy to bring down inflation now, the pain in the economy from transitioning to a high inflation regime” and getting caught there is much greater.
He added that this would lead to wage price fluctuations, which would be “more painful to the economy and to men and women in the street in the long run.”
“It’s hard to say well… Bringing this pain up front and lowering inflation is better for the global economy and society than letting inflation get out of control as we learned in the 1970s.”