The US economy is likely to witness a mild recession by the end of this calendar year as the US Federal Reserve raises rates to tame prices, said a report by Nomura Holdings adding that any potential contraction in the world’s biggest economy could affect India’s growth in the medium term.
“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.
It added that when combined with elevated levels of inflation that is eroding consumption growth and the growth sacrifice from tighter financial conditions, suggests a broader growth slowdown for India over the medium term.
“Our US economics team has recently downgraded its base case for the US economy to a mild recession starting in Q4 2022, reflecting tighter financial conditions, a negative sentiment shock for consumers, worsening energy and food supply disruptions and weaker global growth prospects,” Nomura said.
It also said the Indian economy is racing towards pre-Covid normalcy owing to rising levels of consumption and investment. India’s service sector, which trailed 4 per cent below pre-Covid levels in March 2022, has now reached 40 per cent above those levels.
It expects India’s GDP to expand 7.2 per cent annually in 2022 and at a slower clip of 5.4 per cent in 2023 with downside risks.
Meanwhile, Goldman Sachs economists have now revised upward the chances of entering a recession in the next one year. They now see a 30 per cent probability of entering a recession over the next year, up from 15 per cent previously, and a 25 per cent conditional probability of entering a recession in the second year if one is avoided in the first, according to the latest note by Goldman Sachs.
“We now see recession risk as higher and more front-load. The main reasons are that our baseline growth path is now lower and that we are increasingly concerned that the Fed will feel compelled to respond forcefully to high headline inflation and consumer inflation expectations if energy prices rise further, even if activity slows sharply,” according to a Bloomberg report quoting the note written by economists led by Jan Hatzius.
BofA Securities’ economists also see roughly a 40 per cent chance of a US recession next year, with inflation remaining persistently high. They expect US gross domestic product growth to slow to almost zero by the second half of next year “as the lagged impact of tighter financial conditions cools the economy,” while they see just a “modest” rebound in growth in 2024. They now expect global economic growth of 3.2 per cent. They said they had forecast 4.3 per cent global growth going into 2022.
The US central bank recently raised 75 basis points (bps) to control high inflation. This is the biggest hike in interest rates since 1994. It had earlier planned a 50-bps hike for the June meeting but the US consumer inflation came higher than expected in May, at a four-decade high of 8.6 per cent.