Has Nomura predicted that the US would slip into recession this year?

Markets are still divided over whether the US would actually slip into recession or whether it will just be a temporary slowdown. The first view coming from Nomura expects a mild recession in the US towards the end of the current year as an outcome of the ultra-hawkish stance of the Fed. By then, the Fed is expected to have hiked rates to around 3.5% on an average. With slowing growth momentum and Fed planning to go the whole hog on price stability, Nomura places a high probability on a mild recession in the Fourth quarter.

The explanation given by Nomura for this view is that the financial conditions could tighten further as consumer sentiments start souring. That is already visible. Already, energy and food supply distortions have worsened and the outlook for global growth is getting bleaker and bleaker by the day. However, it is expected that the growth impact may be muted till the time the rate of interest reaches the range of 3.50-3.75%. That is more likely to now happen in the end of 2022 rather than in middle of 2023. So, there is a lot of front ending of rate hikes that is expected this year.

Talking about the US economy, Nomura lowered real GDP forecast for 2022 from 2.5% to 1.8%; a 70 bps down tick. Even the estimates for year 2023 have been lowered from 1.3% to 1%. So it looks like the US will see tepid growth for the next few years. The big triggers for the slowdown would be the persistence and stickiness of inflation and a single-minded Fed pursuit of controlling inflation at all costs. Currently, the Fed is also prepared to risk a slowdown to achieve targets on inflation, which is no longer treated as transitory.

The irony, according to Nomura, is that despite the Fed’s clear cut hawkishness since November 2021, inflationary pressures have actually worsened rather than improving. Analysts at Nomura believe that the Fed may be looking to check demand at a time when supply chain bottlenecks are the real issue. This could have the snowballing effect of driving the economy into a mild recession. After all, it is going to be price stability, first and foremost.