Nomura Calls For Recessions In US, EU, UK, Japan, Australia, Canada

“Downgrading global growth,” reads the title of a July 1 anchor piece from Nomura’s economics team.

Just above the title is a picture of someone removing a block from a wobbly Jenga tower.

On Thursday, following an updated “nowcast” which suggested the US economy is on track for a second consecutive quarterly contraction, I noted that no Fed official is on the record calling for a recession. In the same linked article, I wrote that Wall Street economists won’t be any more excited than Fed officials when it comes to adopting a US recession as their base case.

Nomura did take the plunge last month. On June 19, the bank cut its outlook for the US and called for a recession starting in Q4 of this year. On Friday, the bank’s global economics team “decided to bite the bullet,” as they put it.

“Economists have a poor track record in forecasting recessions,” Rob Subbaraman and Si Ying Toh wrote, on the way to calling for recessions in Europe, the UK, Japan, South Korea, Australia and Canada. “Perhaps it is human nature and because recessions are nasty outcomes that the consensus of economists tend to only forecast when they are plainly obvious,” they added, on the way to noting, as I did Thursday, that “not one of the 18 participants at the June FOMC projected an outright decline in US real GDP.”

The bank cited familiar factors. Recessions in major economies will be driven by rate hikes and a near universal cost of living crunch tied to soaring commodity prices and tighter financial conditions. The table (below) shows the bank’s updated forecasts.

In addition the stagflationary conjuncture described above, Nomura’s team noted that when growth slows synchronously, countries can’t depend on exports to save the day.

As the table (above) shows, the bank sees a long, five-quarter recession for the US. “Strong household balance sheets should limit the depth of the recession but, unlike recent decades, we expect no policy support, with the Fed hiking rates into the recession as it focuses on its now single mandate of getting inflation back under control,” Nomura said.

For now, the bank’s forecasts for Europe aren’t terribly onerous, but the risks are asymmetrical — to the downside, obviously. If Russia were to cut gas flows to the bloc entirely, Europe could enter a “much deeper recession,” Nomura cautioned.

As for South Korea, Australia and Canada, the bank warned on notoriously frothy housing markets, which are vulnerable to higher rates, something policymakers are apprised of, but unable to prioritize given the necessity of fighting the inflation war. On Thursday, after hiking rates 50bps, Sweden’s Riksbank conceded that an “abrupt adaptation process” could cause housing prices to “fall considerably,” leading to weak household consumption. New Zealand has the same problem.

“South Korea, Australia and Canada have had debt-fueled housing booms and are at risk of deeper-than-forecast recessions, if interest rate hikes trigger housing busts and deleveraging,” Nomura said Friday.

As for inflation, the bank doubts price pressures will recede rapidly. “Inflationary pressures have broadened and intensified beyond commodity prices to services items, rentals and wages which, alongside rising consumer inflation expectations, point to more persistent inflation,” the bank wrote, adding that “in all likelihood, some of the longer-run global disinflationary forces like globalization and demographics are dissipating and giving way to splintering global supply chains from heightened geopolitical risks, and ‘greenflation’ from climate change transition and more extreme weather events.”

Remember: It was long run global disinflationary forces — structural “enablers,” as it were — which allowed central banks to persist in a generally accommodative policy bent for three decades, during which each tightening cycle generally undershot the prior easing cycle, leading to easier and easier policy over time. The pandemic and, later, the war in eastern Europe, dislodged some of those disinflationary enablers, raising the specter of structural inflation.

The read-through for the vaunted policy “put” is straightforward. “What does high inflation yet sharply slower growth and recessions in many major economies mean for monetary policy?” Nomura asked, before answering their own question: “We expect central banks to focus monetary policy solely on their number one mandate, returning inflation back toward target, even if it involves some growth sacrifice.”