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The biggest risk facing the global economy by late 2022 may be recession, not stagflation, as cost-driven price pressures hurt still-weak domestic demand and tighter fiscal and monetary policies turn into a drag, according to Nomura Holdings.
For most countries, there is “the dominance of cost-push inflation – the bad kind of inflation that squeezes profit margins, erodes real household income and tends to self-correct when demand is weak,” Nomura economists led by Rob Subbaraman wrote in a 2022 outlook report. On December 10.
Economists wrote that most economies, including the eurozone, the United Kingdom, Japan and China, have not fully recovered from the ongoing pandemic, and their fragile private demand makes them vulnerable to growth setbacks.
The slowdown in growth could come from eroding earnings and household income from rising inflation, increased savings amid economic uncertainty, and fiscal policy turning out to be a major drag, the report said.
Economists wrote that the US economy will continue to be the odd economy, as the country has recovered to “full power demand” and thus has a greater cushion to absorb cost-push inflation. With monetary and fiscal policies tightening, the US is in a better position to stabilize in Goldilocks-type conditions in 2022 around target inflation and trend growth, according to Nomura.
If the US experiences hyperinflation in the first half of 2022, which is not a base case scenario for Nomura, the Fed could raise interest rates significantly. If this scenario materializes, “this reinforces our view that the greatest risk to the global economy in late 2022 is secular stagnation, not stagflation.”
Nomura also predicts:
The US will face a much weaker second half next year with annual growth just under 2% in the fourth quarter, helping to keep the Fed on track to gradually raise interest rates.
The European Central Bank will not raise interest rates next year, as the company sees inflation eventually return below target
Long-running operation in China, with the economy’s growth slowing to 2.9% year-on-year in the first quarter
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