Nomura crystal ball predicts US recession in 2022

The big question in the market today is whether the US would actually slip into recession and when? Latest estimates by Nomura suggest that the US economy could fall into a mild recession by the end of 2022, by which time the Fed is expected to have hiked the repo rates to around 3.5% on an average. With slowing growth momentum and the Fed wanting to go the whole hot on price stability, a mild recession starting in the fourth quarter of 2022 looks extremely likely to the economists at Nomura Research.

One of the key contentions of Nomura is that the financial conditions could tighten further as consumer sentiments start souring. Already, the energy and food supply distortions have worsened and the outlook for global growth is getting tighter by the day. However, initially the response of the US Fed to the slowdown would be muted, at least till the time the rate of repo interest reaches the range of 3.50-3.75%. That has already been front-ended to early 2023 than the original schedule of mid-2023. 

For the US economy, Nomura lowered its real GDP forecast for 2022 from 2.5% to 1.8% and the projection for 2023 had been lowered from 1.3% to 1%. Effectively, the US will grow at sub-optimal rates of growth for the next couple of years. The big triggers for the slowdown are likely to be the persistence of inflation and a single-minded Fed that is hell bent on beating out inflation back to normal levels. It looks like the Fed is even prepared to risk a slowdown to achieve its targets on inflation, which it no longer considers transitory.

Nomura has pointed out that despite the Fed’s patent hawkishness since November 2021, inflationary pressures have not eased but may have actually worsened in this period. Consequently, the Nomura analysts believe that the Fed’s efforts to realign demand with depressed supply to rein in price pressures may have the deleterious impact of driving the economy into a mild recession. Fed officials have been unequivocally clear they will prioritise price stability and for now it is price stability at all costs.