Officials at both the US Federal Reserve and European Central Bank are warning about a potential lending squeeze resulting from the ongoing turmoil in the banking sector.
Driving the news: Experts (including Fed Chair Jerome Powell) fear that, in the wake of Silicon Valley Bank’s collapse, banks will try to protect their balance sheets and depositor confidence by tightening lending practices, which could spiral into a full-blown credit crunch.
Why it matters: A US lending squeeze could have widespread implications for the global economy since the US dollar is what keeps both global trade and financial systems running. “Tighter US financial conditions can quickly spread to other economies,” per The WSJ.
- Lending to households and businesses plays a vital role in stimulating economic growth, and banks were already doling out less thanks to all those interest rate hikes.
- Per a monthly Bank of America survey, a “systemic credit event” (i.e. a credit crunch), is now the most-feared market risk amongst fund managers, overtaking inflation.
Global GDP for 2023 was trending down at the start of the year, and though estimates rebounded recently, shocks to the financial system will weigh on growth. Citigroup estimates the economy will only grow by ~2.2% this year, and that’s if this whole thing blows over,
- Citigroup’s estimate is lower than the OECD’s 2.6% prediction. If concerns over the banking sector’s health persist, the bank says global growth could slow to 1.6%.
That’s bad news bears, as consistent GDP growth is crucial to innovation and tackling global challenges. The World Bank is now warning of a "lost decade" for the world economy.
What’s next: Some experts believe the current fragility of global banking means we are nearing peak interest rates, with some banks even ready to cut interest rates by year’s end. This is, of course, if inflation also starts dropping to target levels (still a big if).—QH