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Will the recent banking turmoil lead to an economic collapse?

hhurry up Things change. Not so long ago, analysts thought the global economy was booming; now they worry about a deep recession as a result of the banking turmoil. “From no landing to hard landing,” wrote Torsten Slok of asset manager Apollo Global Management. Analysts at JPMorgan – better at economics than metaphors, one hopes – say “a soft landing now looks unlikely, with planes in disarray (lack of market confidence) and engines about to die (bank loans)”.

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Evidence before the chaos suggests global gross domestic product The annualized growth rate is 3%. In rich countries, job markets are booming. So far, there is little evidence that “real-time” data is shifting towards slower growth. Goldman Sachs’ “current activity indicator,” derived from various high-frequency indicators, looks solid. Purchasing managers’ indices improved slightly in March.weekly measures gross domestic product Depend on OECDa wealthy country club, is holding out. Swiss bankanother bank, tracks global gross domestic product Increases in pricing in financial markets (such as the price of oil and cyclical stocks). This currently suggests a growth rate of 3.4%, compared to SVB’s previous 3.7% (SVB)collapsed.

It’s still early days. Pain may be on the way. Economists have two concerns, as JPMorgan analysts point out. One is uncertainty. If people fear a banking crisis and the economic pain that will follow, they may cut consumption and investment. The other has to do with credit. Financial institutions fearful of losses could scale back lending, depriving businesses of capital. Fortunately, there are reasons to think the impact of the recent turmoil has been less severe than many had feared.

Consider uncertainty first. International Monetary Fund Research published in 2013 found that sharp increases in uncertainty caused by events such as the U.S. invasion of Iraq and bank failures could cut annual gross domestic product The 0.5 percentage point increase was largely due to businesses delaying investment. If such a hit materialized, global growth would fall from 3% to 2.5%.

However, unless the turmoil continues, the impact is unlikely to be that big – with bank failures making little impression. A survey by pollster Ipsos found that U.S. consumer confidence rose from early to mid-March, even as Silicon Valley startups worried their cash would disappear. An “uncertainty index” from an analysis of newspapers by Nick Bloom of Stanford University and colleagues rose slightly at the start of the turmoil but is falling back. German business confidence improved in March. Google searches for terms related to “banking crisis” spiked in early March, but also fell again.

It’s hard to say why people are so annoyed. Perhaps after plague and war, turmoil in banking seemed more manageable. Or people might think the government will step in to protect them.

Many economists worry more about the second issue: credit. If companies can’t get financing, they can’t grow so easily. When asked on March 22 about the link between tighter credit conditions and economic activity, Fed Chairman Jerome Powell referred to the “vast literature”. In the years following the 2007-09 global financial crisis, broken credit markets held back both short-term economic recovery and long-term productivity growth.

after the fall SVB, the capital market freezes. No new investment-grade debt was issued by US companies from March 11 to 19, compared with an average of $5 billion per day in January and February. This caused consternation. When the market picks up, few notice. Brown-Forman, which makes Jack Daniel’s whiskey, and utility NiSource have raised significant funding in recent days.While corporate bond spreads rose slightly after the stock market crash SVB, they have also retreated in recent days. Companies may hold off on issuing new debt for now to make sure everything goes smoothly. But it turns out that March 2023 could be a pretty average month for corporate bond issuance.

As it turns out, the damage to banks would be far worse. Shares in the global bank have fallen more than 10% since early March. Research shows that falling stock prices tend to affect loan growth. Banks may also cut lending if they see outflows of deposits or need to raise capital because investors doubt their safety. In fact, many seem to be tightening standards already. The hit to lending means a 0.4 percentage point drag on growth in the U.S. and the euro zone, Goldman Sachs said. The turmoil may hurt U.S. banks more, but the eurozone economy is more reliant on bank loans. This could further reduce the global growth rate from 2.5% to around 2%.

While the latest banking turmoil isn’t exactly good news, it’s unlikely to push the world economy to the brink of collapse. Granted, another bad bank could lead to a downward spiral. Lenders need time to rebuild their balance sheets. Rising interest rates will continue to hold back growth until central bankers judge that their job is done. But there are also other forces working in the other direction. One is China’s rebound. Economists expect the world’s second-largest economy to grow by more than 7% year-on-year in the second quarter of this year. At the same time, supply chain bottlenecks have largely eased and energy prices have dropped. Don’t be surprised if the unusual resilience of the world economy continues.

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