Nomura Subowen: US recession is imminent, rate cuts won't be too quick, bright spots in Southeast Asia

Overseas economic tightening is gradually coming to an end, but the central bank's battle against inflation is still far from being won. The resilience shown by the economy has led to ongoing debates in the market regarding the possibility of a soft or hard landing for the European and American economies. Which economies will lead the growth in the future?

In this regard, Mr. Su Bowen, Head of Nomura's Global Macro Research and Co-Head of Global Market Research, shared his insightful views on the global economy at the 15th Nomura China Investment Annual Conference:

• Global growth is slowing down, and the US economy is expected to experience two consecutive quarters of recession in the fourth quarter of this year and the first quarter of next year. The cumulative effect of interest rate hikes and depleted excess savings are the main factors, with labor market performance lagging behind.

• It may be difficult to bring inflation down to 2%, which poses a significant challenge for central banks. Therefore, central banks will not cut interest rates quickly. The earliest the US will start cutting interest rates is after two quarters of recession.

• The future bright spot lies in emerging markets in Southeast Asia, including India, Indonesia, the Philippines, and other emerging economies, where economic growth is expected to exceed 6%. This is mainly due to the development potential of their labor markets and the significant infrastructure demand.

• Attracting more multinational investments in India will be a slow process. India's infrastructure is still underdeveloped and there is a need to train the workforce to improve efficiency.

US Economy Heading into Recession

We believe that global growth is slowing down. The US economy is heading into a recession, with two consecutive quarters of negative growth expected in the fourth quarter of this year and the first quarter of next year. Business survey data for the European economy also shows weakness, indicating an increasing risk of recession in the future. The entire Asian economy is also facing challenges of slowing growth and disastrous climate conditions. However, the future bright spot lies in Southeast Asia.

Although the US economy has shown considerable resilience so far, we need to pay attention to three things:

First, the labor market is the last part of the economy and is a lagging indicator of the cycle. In fact, workers are only laid off when company performance significantly deteriorates.

Second, the current interest rate hike cycle by the Federal Reserve is very aggressive. The cumulative effect of interest rate hikes has not been fully reflected yet. When households and companies refinance and reset interest rates to new, higher levels, it will further weaken the economy.

Third, the excess savings during the pandemic, as households start to deplete all that money, they will have no extra savings buffer to pay for expenses and support consumption. Therefore, these factors will significantly slow down the US economy in the fourth quarter, with a 0.4% decline compared to the previous quarter.

Leading indicators such as the inverted yield curve and credit conditions surveys are already in recession territory, indicating that the US economy will experience a recession in the next two quarters.

The Low Interest Rate, Low Inflation Paradigm Has Changed

Inflation will continue to decline. We observe that most potential inflation indicators, including the US and even Europe, are showing signs of decline. The decline in inflation in Asia is even more significant. Central banks are slowly winning the battle against inflation, but it is still too early to claim victory. Inflation will persist to some extent. The pattern of low inflation and low interest rates over the past decade may have changed, and I believe the economy will not return to pre-pandemic levels. Essentially, global investment may be stronger than global savings, which will raise the level of natural interest rates. Although an aging population will require higher savings, globalization, climate change, the green sector, and even defense spending all indicate the need for more investment. In terms of fiscal policy, there are currently very large budget deficits globally that need financing. This may also put upward pressure on long-term interest rates.

The risk of inflation lies in its sustainability. As the inflation rate declines, we may fall into inflation of around 3%, making it difficult to lower it to 2%. This situation will be very challenging for central banks. Especially in Europe, it will take more time for inflation to decline. Therefore, although our growth forecast is lower than consensus expectations, we also believe that central banks will not quickly cut interest rates. The US will enter a recession in the fourth quarter of this year, but it is predicted that the Federal Reserve will not start cutting interest rates until March next year at the earliest. The timing of interest rate cuts by the European Central Bank and the Bank of England will be even later.

Due to the global economic weakness, Japan is struggling to achieve sustainable inflation of 2%. Therefore, the Bank of Japan will maintain negative interest rates for some time. However, compared to Europe and the United States, Japan's economy shows more positive factors, which will drive more investment and higher productivity growth. In the medium term, Japan's economic growth rate will be faster than in the past.

South Korea's interest rates have already peaked, and Korean households are facing higher debt costs and falling housing prices. Therefore, the consumption outlook in South Korea is more negative. South Korea will experience a recession, and the Bank of Korea will be the first in Asia to cut interest rates, starting in January next year.

The future bright spot lies in the emerging markets of Southeast Asia

Including India, Indonesia, the Philippines, and other emerging economies, their economic growth rate will exceed 6%. This is mainly due to the development space of the young population in their labor markets and their demand for a large amount of infrastructure.

With the diversification of multinational company supply chains, emerging market countries will attract a large amount of investment. Among them, Indonesia, Thailand, Malaysia, and the Philippines may perform better. In contrast, cost pressures have emerged in Vietnam and Mexico, including rising labor costs and shortages of raw materials.

India's latest inflation is relatively high, exceeding 7%, mainly driven by food prices. The monsoon in India has pushed up the prices of many vegetables, with tomato prices rising by more than 200%. The inflation rate is expected to start declining again by the end of this year. Due to reduced government investment and weak exports, India's growth rate may have peaked and will slow down in the second half of the year.

India has made some progress in attracting more multinational investments, but this will be a slow process. India's infrastructure is still underdeveloped and there is a need to train the workforce to improve efficiency. India needs more time to enhance its manufacturing capabilities. India's advantages lie more in the service sector.