Will the recent bank turmoil lead to economic collapse?
firequick things change. A few weeks ago, analysts believed the global economy was moving forward. Now they fear a deep recession as a result of the collapse of the United States. Silicon Valley Bank (svb) and rescue credit suisse“From a no-landing to a hard-landing,” wrote Thorsten Throck, an economist at asset manager Apollo Global Management. JPMorgan Chase analysts hope they are better at economics than metaphors, but “the plane is stalling (lack of market confidence) and the engine is about to die (bank lending ), so a soft landing is unlikely.”
evidence from the recent past bank turmoil global proposition gdp It was growing at an annual rate of about 3%. Job markets were burning in rich countries. So far, there is little evidence that ‘real-time’ data is shifting to slow growth. The ‘current activity indicator’ produced by the bank Goldman Sachs is derived from a variety of high-frequency indicators and appears to be stable. The Purchasing Managers Index showed him a slight improvement in March.weekly measures gdp generated by OECDthe wealthy country club is holding up. UBTrack Different Banks, Global gdp Growth rates priced by financial markets (for example, the price of oil or cyclical stocks). This represents a current growth of 3.4% compared to 3.7% previously. svb collapsed.
It’s still early days. Pain may be on the way. Economists have two concerns, as JP Morgan analysts metaphorically illustrated. The first is uncertainty. If people fear a banking crisis and the economic pain that comes with it, they may cut back on consumption and investment. The second is about credit. Fearing losses, financial institutions may refrain from lending, depriving businesses of needed capital. Fortunately, there is reason to believe that the recent turmoil in the banking industry will be less impactful than many fear.
Accept the uncertainty first.Research published by imf In 2013, a surge of uncertainty caused by the US invasion of Iraq, bank failures, etc. gdp Growth increases by up to 0.5 percentage points, mainly because companies delay investment. If such a blow were to materialize, global growth would drop from he 3% to perhaps 2.5%.
However, bank failures surprisingly did not affect people as long as there was no turmoil, so the impact is unlikely to be that great. In early-to-mid-March, despite Silicon Valley startups worrying they were running out of money, American consumer confidence actually rose, according to a poll by pollster Ipsos. We found that it rose slightly. The “uncertainty index,” derived from newspaper analysis by Nick Bloom and others at Stanford University, rose slightly when the turmoil began, but is trending downward. continued to improve. Global Google searches for terms related to “banking crisis” spiked in early March but then declined again. It’s hard to say why people are so stupid. Or maybe people think the government will step in to protect them.
Many economists are more concerned about the second issue, credit. If a company can’t get access to finance, it won’t grow as easily. On March 22, Federal Reserve Chairman Jerome Powell referred to “a great deal of literature” when asked about the relationship between tightening credit conditions and economic activity. In the years following the global financial crisis of 2007-2009, the collapse of credit markets hampered short-term economic recovery and long-term productivity gains.
after the collapse of svb, the capital markets were essentially frozen. From March 11 to 19, no US companies issued new investment-grade bonds, and in January and February he issued an average of $5 billion a day. This caused a surprise. But few people noticed that the market had recovered since then. In recent days, his Brown-Forman, which makes Jack Daniel’s whiskey, and his NiSource, a large utility company, have raised a lot of money in the bond market. After the collapse, spreads on corporate bonds rose slightly, but svb, they have also recently stepped back. Companies may have temporarily postponed the issuance of new debt to make sure the issue was resolved. March 2023 looks likely to be a fairly average month for bond issuance.
The damage to the banking system will arguably prove to be more significant. Since early March, Global Bank’s share price has fallen to one-sixth of his. Academic evidence suggests that falling stock prices tend to affect loan growth. Banks may also cut lending if they see deposit outflows or if investors question their safety and need to raise capital. In fact, it seems that the banks of the rich world are already tightening their standards. A new paper from Goldman Sachs said the hit to bank lending would mean a drag on growth of about 0.4 percentage points in both the US and the eurozone. The turmoil may have hit American banks even harder, but the Eurozone economy is more dependent on bank lending. If that happens, global growth could slow further, to around 2.5% to 2%.
The recent bank turmoil isn’t good news, but it’s unlikely to push the global economy to its limits. Indeed, things could get much worse. The discovery of another rotten bank could set off a downward spiral.It will take time for banks to rebuild their balance sheets and get loans. Rising interest rates will continue to hamper growth until the central bank decides its job is done.
But there are also forces that act in the other direction. One is China’s backlash. Economists expect the world’s second-largest economy to grow by more than 7% year-on-year in the second quarter of this year. Meanwhile, supply he chain bottlenecks have all but disappeared and energy prices have fallen. Don’t be surprised if the extraordinary resilience of the global economy continues. ■
https://www.economist.com/finance-and-economics/2023/03/28/will-the-recent-banking-chaos-lead-to-an-economic-crash Will the recent bank turmoil lead to economic collapse?
