If Survival is a cake walk, should play nightmare. Okay, so Casual, Survival, and Nightmare in this game are actually REALLY different to each other. For the record, and here's an example, the Prima Guide shows that the Lost basic 'punch/swipe' attack does 12 damage on Casual, 30 damage on Survival, and 45 damage on Nightmare. And most damage output is changed like this for all attacks, Casual's damage output is a bit less than half the damage put out on Survival, and the attacks on Nightmarel are about 150% stronger than they are on Survival. Add to this items are a bit scarcer on higher difficulties, there's more enemies and enemy events on higher difficulties (there's this one scene in specific which an enemy will burst through a door, but it only happens on Nightmare difficulty, not Casual or Survival, and there's several other points enemies are added on Nightmare, and taken away on Casual), and various other things like Casual starts with some upgrades already unlocked from the start and Nightmare has some tougher bosses with some new tricks they don't have on easier difficulties.
I do think if you want the 'best' horror experience to play on Nightmare, even the difficulty screen tells you to play Nightmare if you liked the Survival difficulty in the TEW1. But in some ways I think it seems harder, in part because resources are scarcer. Though in other ways it may be easier, as there's also far fewer enemies with a one-hit kill attack now for example (more than zero, but they're a lot rarer now).
I think honestly how they advertise it is good; Casual for who are bad at games/want to experience the story (it's not a cakewalk still, but is much easier and more forgiving), Normal for the average consumer (though it may be harder than the average gamer is used to, but not so much so), and Nightmare for horror game buffs (ad people who want to be challenged and enjoy being strategic with lower resources and tougher situations). None of the difficulties seemed unfair, but they seem at least well advised in trying to provide an appealing experience for different kinds of audiences.
It could happen and actually ended up happening in one boss fight with the player who played on Nightmare where he ran out of all ammo during a boss fight and barely scooted by with just his knife at the end to get the final few hits in. You can craft on the fly with weapon parts (but that means less to upgrade guns with), though one saving grace here is the game does keep a 'log' of saves so if you get absolutely stuck there's both personal saves you've made to return to and you can reload from like, the last five checkpoints you've reached as well.
Keep in mind this game is a Mikami game, gunplay is still a big part. For instance there's more than one of every weapon, I've seen three different handguns you can get fairly early for example (one of them even has a laser sight). I also will add there's a location I won't speak in-depth about called the Marrow which is kind of a connecting point you return to that you slowly unlock over the game to access new parts of Union. You can also return to the Marrow and transverse it to get to previous parts of the game if you want to go scavenging or do stuff there. The Evil Within 2 actually has a consistent world layout like RE1 or RE2 or the like, and the reality shifts are often more these set-piece moments and first-time visit things, but after you complete a major area there is a 'final form' of the location you can freely explore once it's been stabilized (but even in the stabilized versions, there's these very abstract and strange things).
And the honest answer is some combination, okay so for the record the game DOES NOT have infinitely spawning enemies in the Hub World, if you clear an area in the hub world of enemies, the enemies are dead for good (unless some story event happens and new ones come in). The enemies in the hub world are actually NOT randomly generated or anything, they're intentionally designed to be there and set and don't respawn or anything. I think some people when they hear open world think it means the game lacks design, but TEW2 is weird in that it's still rather 'designed' in even the open areas. It really is quite a bit like Silent Hill 1's town segments, since it behaves very similar to those, just with side-quests kind of like Downpour's where you stumble upon areas you can explore/mysteries to partake in.
Then on-top of this, there's areas with far more connected to them that you return to a few times and unlock more of the location. Here's a screencap of one such area:
(this map is also only of one floor of this area, this area has three different floors. Also, there's maps of all the locations in TEW2 now).
There are actually pretty large interconnecting areas you do have to plan your route out for, actually.
