Nomura wakes in fright. My only issue with this analysis is that it may still be too slow, inflation will bust faster and rates not get so high.
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- With rapidly slowing growth momentum and a Fed committed to restoring price stability, Nomura believes a mild recession starting in Q4 2022 is now more likely than not (ZH: expect the mood to deteriorate further as “mild” eventually becomes “jarring”).
- Financial conditions are likely to tighten further, consumers are experiencing a significant negative sentiment shock, energy and food supply disruptions have worsened and the outlook for foreign growth has deteriorated. All these factors will likely contribute to the expected downturn.
- Relative to previous downturns, Nomura believes that the significant strength of consumer balance sheets and excess savings should mitigate the speed of the initial contraction. However, policymakers’ hands are tied by persistently high inflation, limiting any initial support from monetary or fiscal stimulus.
- The bank lowered its real GDP growth forecast in 2022 to 1.8% y-o-y (-0.3% Q4/Q4), down from 2.5% (1.4% Q4/Q4). In 2023, it expects real GDP to decline 1.0% y-o-y (-1.2% Q4/Q4), down from +1.3% (+0.6% Q4/Q4).
- The bank also expects the unemployment rate to rise to 5.2% by end-2023 and 5.9% by end- 2024, above previous expectation of a rise to 4.3% over that period.
- For inflation, the near-term impact of the bank’s economic outlook revision is more muted considering the persistent nature of rent inflation and rising inflation expectations. Nomura only lowered its Q4/Q4 2022 core PCE inflation forecast 0.1% to 4.4%, largely reflecting core goods prices. However, the Q4/Q4 2023 core PCE inflation forecast now stands at 2.4%, down from 2.8% previously.
- With monthly inflation through 2022 likely to remain elevated, Nomura economists believe the Fed response to the downturn will initially be muted, and expect ongoing rate hikes to continue into 2023, but with a slightly lower terminal rate of 3.50-3.75% reached in February (down from our previous forecast of 3.75-4.00% in March). However, it now expects rate cuts in H2 2023, lowering the funds rate to 2.875% by end-2023 and 0.875% by end-2024.
