Recession to Hit Major Economies in the Coming Year
According to a forecast by the chief economist of Nomura Holdings Inc., a brokerage firm in Japan, several major economies will experience a recession over the next 12 months as a result of rising living expenses (inflation) and tightening governmental regulations. At this time, the majority of central banks have virtually changed their focus to reducing inflation. Credibility in monetary policy is a valuable asset that cannot be lost. The central banks will therefore be highly aggressive, according to Rob Subbaraman, head of global markets research for Asia Ex-Japan.
According to the analysis, before lowering rates in 2023, central banks are expected to tighten monetary policy to control inflation at the risk of sacrificing growth. However, despite a widening of pricing pressures following a spike in commodity prices, inflation will continue to be sticky. Furthermore, nations won’t be able to rely on exports to push them back into expansion due to the ‘synchronised growth slowdown’ of the global economy. To rebuild their credibility, the central banks are anticipated to err on the side of tightening too much rather than too little, the note said.
Increased front loading rates will be the result. Several months ago, there have been warning about the dangers of a recession, and now the economies have taken the plunge. To curb inflation, central banks around the world maintained an ultra-loose monetary policy for an excessively long time, according to Subbaraman. And right now, many of the developed economies are experiencing a recession, he continued. To recover control of the inflation narrative, governments must now play catch-up.
According to Nomura, the EU, the UK, Japan, South Korea, Australia, Canada, and the US are anticipated to go into recession. This will cause the global economy to slow down synchronously, according to economists Rob Subbaraman and Si Ying Toh of Nomura. The major causes of the slump, according to them, are tightening monetary policy, accelerated inflation, and deteriorating financial conditions. The statement continued by stating that given the spread of price increases from commodities to services, housing, and wages, strong inflation is expected to continue.
The report stated that there are numerous recessions expected as a result of increasing indicators that the world economy is entering a synchronised economic slowdown, meaning countries can no longer rely on a rebound in exports for growth. Each country will experience a recession at a different level, according to analysts.
It is predicted by analysts that in the US, a five-quarter prolonged, modest recession will begin in the last quarter of this year. As a result of persistent supply interruptions, high inflation, rising interest rates, and low consumer confidence, growth is being slowed. The Federal Reserve will begin lowering rates by 0.25 percentage points per meeting starting in September 2023 after hiking the benchmark rate as high as 3.75 per cent in February. Rate cuts from Australia, the U.K., Canada, South Korea, and the euro area are also predicted by Nomura economists.
The note also stated that the odd one out is China, which is rebounding from recession as the economy unlocks amid accommodating measures. However, it is at risk of fresh lockdowns and another recession, so long as Beijing persists in its zero-Covid approach.
A five-quarter shallow but long Inflation in the U.S
Nomura predicts a five-quarter U.S. recession that will be modest but long, beginning in the last quarter of 2022. In Q4 of this year, GDP will expand at a negative rate from quarter to quarter because the United States will enter a recession. Although it will be brief, the recession will be protracted. It will be lasting for five consecutive quarters, said Subbaraman.
With rate increases, the U.S. Federal Reserve and the European Central Bank are two of the institutions that are trying to curb high inflation. In June, the Federal Reserve raised its benchmark interest rate by 75 basis points, bringing it to a range of 1.5 per cent to 1.75 per cent. Fed Chair Jerome Powell has suggested that a further increase of 50 or 75 basis points may occur in July.
‘Because we believe that inflation will be sticky and continue to be high, the Fed will be tightening during this recession. It will be difficult to come down’ said Subbaraman. The analyst summarised Nomura’s projections, stating that ‘we have the Fed increasing 75 [basis points] in July and then 50 at the next meeting.’ Thereafter, a set of 25 [basis points] will be added until the Fed funds rate reaches 3.75 per cent by February of the following year.
Industry experts like Scott Minerd of Guggenheim agreed with Nomura’s predictions. He recently issued a warning that the Fed is unlikely to care about the current stock sell-off until fear overwhelms the market because it is ‘hell-bent’ on battling inflation. Further optimism about the US economy was muted by Fed Chair Jerome Powell, who said that while a slowdown was absolutely a possibility, the central bank is not seeking to trigger one.
According to Nomura, it does not anticipate the Fed to start lowering rates until September 2023 since a modest initial inflation response will probably keep policymakers – both monetary and fiscal – on the sidelines. It continued in its statement that strong beginning conditions may reduce the first-rate of contraction, but the absence of policy responses may extend the downturn.
Analysts also predicted that Europe would experience a recession similar to the one in the US, if not worse. If Russia completely cuts off gas to Europe, the downturn there might be far worse, they cautioned. Nomura, a Japanese financial services company, projects that in 2023, the economies of the US and the euro area will both decrease by 1%.
Mid-sized Economies have larger risks.
In the research report, Nomura highlighted several mid-sized economies that saw debt-fueled property booms, including Australia, Canada, and South Korea. According to the analysis, if interest rate increases lead to a housing crisis and deleveraging, mid-sized economies like Australia, Canada, and South Korea could experience recessions that are more severe than expected.
With a 2.2 per cent decline in the third quarter of this year, Korea is expected to take the earliest hit. In addition, they predicted that Japan will experience the group’s mildest recession due to continuous policy support and delayed economic recovery.
China, the second-largest economy in the world, may avoid experiencing another economic downturn after coming out of one in the second quarter of this year. However, as long as Beijing adheres to its zero-Covid plan, they added, China will continue to be at risk of future lockdowns and recession despite its economy’s recovery thanks to accommodating measures.
Subbaraman cautioned that the damage to the economy of moving to a high inflation regime and becoming stuck there is much worse if central banks do not tighten monetary policy now. In the long run, it will cause wage-price spirals, which will be far more devastating for the economy and the man and woman on the street, he continued.
It’s difficult to say this politely, but avoiding future hardship and bringing inflation down is healthier for the global economy and society than allowing inflation to spiral out of control, as was discovered in the 1970s.
edited and proofread by nikita sharma