The US economy will likely fall into a mild recession by the end of 2022 as the Federal Reserve raises rates to tame prices, according to economists at Nomura Holdings Inc.
Nomura warns that financial conditions will tighten further, consumers sentiment is souring, energy and food supply distortions have worsened and the global growth outlook has deteriorated.
“With rapidly slowing growth momentum and a Fed committed to restoring price stability, we believe a mild recession starting in the fourth quarter of 2022 is now more likely than not,” Nomura economists Aichi Amemiya and Robert Dent wrote in a note Monday.
Excess savings and consumer balance sheets will help mitigate the speed of economic contraction, they said, but noted that monetary and fiscal policy will be constrained by high inflation.
Nomura has lowered its real GDP forecast for this year to 1.8%, compared to 2.5% earlier, while the projection for next year is seen declining 1%, from 1.3% growth earlier.
The analysis comes as Treasury Secretary Janet Yellen said Sunday that “unacceptably high” prices are likely to stick with consumers through 2022 and that she expects the US economy to slow down.
Separately, Federal Reserve Bank of Cleveland President Loretta Mester said Sunday that the risk of a recession in the US economy is increasing and that it will take several years to return to the central bank’s 2% inflation goal.
“With monthly inflation through 2022 likely to remain elevated, we believe the Fed response to the downturn will initially be muted,” the Nomura analysts wrote in their note.”
They expect ongoing rate hikes to continue into 2023, but with a slightly lower terminal rate of 3.50-3.75% reached in February, compared to the previous forecast of 3.75-4.00% in March.
Impact of US Recession on India
Indian companies have major outsourcing deals from the US. India’s exports to the US have also grown substantially over the years. The India economy is likely to lose between 1 to 2 percentage points in GDP growth in the next fiscal year. Indian companies with big tickets deals in the US would see their profit margins shrinking.
Commenting on this, Sudip Bandyopadhyay, Director, and CEO of Reliance Money said, “In the globalized world, complete decoupling is impossible. But India may remain relatively less affected by adverse global events.”
“In fact, many small and medium companies have already started developing trade ties with China and European countries to ward off big losses.” He added.
