- United States: The H1 contraction will be followed by a protracted period of sub-par growth, but the ongoing deceleration is so far not yet due to Fed tightening; cracks are appearing in an apparently strong labour market, and we expect the lack of productivity to cause a labour market correction. This raises the recession risk for mid-2023, when monetary policy action is expected to take more effect. Easing, but still high, inflation is ahead. Bottlenecks and price pressures are easing, but are staying high. This should push down goods inflation, but lower rent inflation is a 2023 story, meaning inflation will stay significantly above target for several quarters still.
- Eurozone: Extreme weather conditions, compounding with the Russia gas issue, are extending the stagflationary shock, amidst limited fiscal room, weak global growth, and tighter financial conditions, leading to recession in autumn-winter. It will be a cost-of living-driven crisis, as consumers and companies will face further energy cost stress. Fiscal support may help somewhat, but policy room is limited. Inflation is expected to peak in winter near double digits, remaining sustained and broad-based, rising until Q4 and plateauing, and decelerating from 2023.
- United Kingdom: We expect the hit from high energy prices to cause a consumer-led recession in winter, but one that is less severe than predicted by the BoE, as we foresee less aggressive tightening and some fiscal support coming to help. We expect double-digit peak inflation in Q4-Q1 on high energy price pass-throughs, while the new PM is likely to deliver some fiscal support to households for high energy prices.
- Japan: Economic recovery in Q2 came in softer than we expected, as private consumption started to feel the hit from higher food and energy prices. Entering Q3, consumers are caught between stronger inflation and rampant Covid-19 outbreak, while global demand moderates. The economic outlook is dimming, as recovery momentum that stems from a delayed reopening is weakened by plunging export demand, and the latter will likely drag the whole economy into recession in H1 2023. Nevertheless, the input cost pass-through is continuing, which will drive inflation up throughout the rest of 2022.



- Fed: In our scenario, the Fed will hike rates by 75bp at its September meeting and will slow its pace of hikes to 25 bp at the following meetings in November and December. In our scenario, the terminal rate for this hiking cycle is 4% and will be reached at the end of the year. Our view of the rate path for 2023 is different from the market’s, which is pricing rate cuts in the summer 2023. There are no rate cuts in our soft-landing scenario. Recent Fed communication has emphasised rates might need to be higher for longer and that restoring price stability will likely require maintaining a restrictive policy stance for some time to come. In a scenario of soft landing, we are comfortable with stable rates (with a modest rise in the unemployment rate and low growth). A hard landing would, of course, trigger rate cuts.
- ECB: In July the ECB hiked rates by 50bp rather than by the previously announced 25bp, dropped forward guidance and became more data-dependent. The announced TPI was unanimously supported and is unlimited in size, with conditionality linked to already-existing commitments and is flexible in terms of triggering. The TPI announcement indirectly supports our baseline expected scenario on rates, pointing to two further 50bp moves at the next two meetings and to a 25bp move in December. PEPP flexible reinvestments conducted in July confirmed the ECB’s commitment to fighting fragmentation.
- BoJ: Japan’s inflation has strengthened further and the likelihood of core inflation (ex. fresh food and energy) reaching the 2% target in late 2022/early 2023 has increased significantly. This is in contrast to the BoJ’s own benign forecast of a modest increase to 1.5% by FY2024. However, BoJ officials continued to voice up its preference for ultra-loose policy during the August summer recess, citing growth and demand concerns. The BoJ is more likely to brush off a potential overshoot of inflation rates and is maintaining its accommodative stance.
- BoE: The latest meeting delivered a 50bp hike and indicated that active QT is likely to start in October with an expected size within the consensus range. The major news came from the updated set of economic projections, pointing to a much worse growth picture than before, coupled with higher inflation expected this year and next year. New forward guidance underlines significantly increased uncertainty over the path for policy rates over the medium term, with more tightening in the near term likely, but also forecasting a significant growth slowdown and recession.