How quickly things change. A few weeks ago analysts were convinced the global economy was powering ahead. Now they worry about a deep recession caused by fallout from the collapse of Silicon Valley Bank (svb) and the rescue of Credit Suisse. “From no landing to hard landing”, as Torsten Slok, an economist at Apollo Global Management, an asset manager, has written. Analysts at JPMorgan Chase—better at economics than metaphors, one hopes—say that “a soft landing now looks unlikely, with the airplane in a tailspin (lack of market confidence) and engines about to turn off (bank lending)”.
Evidence from before the recent banking chaos suggested that global gdp was increasing at an annualised rate of around 3%. In rich countries, job markets were on fire. So far there is scant evidence of a shift in “real-time” data towards slower growth. A “current-activity indicator” produced by Goldman Sachs, a bank, derived from a variety of high-frequency measures, looks steady. Purchasing-manager indices showed a slight improvement in March. Weekly measures of gdp produced by the oecd, a rich-country club, are holding up. ubs, another bank, tracks global gdp growth as priced by financial markets (in prices of oil and cyclical shares, for example). This currently indicates growth of 3.4%, versus 3.7% before svb collapsed.
It is still early days. The pain may be on the way. And as the JPMorgan analysts illustrated with their metaphor, economists have two worries. The first is uncertainty. If people fear a banking crisis and the accompanying economic pain, they may cut consumption and investment. The second relates to credit. Financial institutions, fearing losses, may pull back on lending, depriving firms of much-needed capital. Fortunately, though, there is reason to believe that the recent banking turmoil will have less impact than many fear.
Take uncertainty first. Research published by the imf in 2013 finds that leaps in uncertainty—which had been caused by things like America’s invasion of Iraq and bank collapses—can trim annual gdp growth by up to 0.5 percentage points, largely because firms delay investment. If such a hit were to materialise, global growth would fall from 3% to perhaps 2.5%.
Yet unless the turmoil continues, the impact is unlikely to be that significant—because the bank collapses made surprisingly little impression on people. A survey by Ipsos, a pollster, found that from early to mid-March American consumer confidence actually edged up, even as startups in Silicon Valley worried their money was going to vanish. An “uncertainty index” derived from analysis of newspapers by Nick Bloom of Stanford University and colleagues, rose a bit when the turmoil began, but is drifting back down. German business sentiment unexpectedly continued to improve in March. Global Google searches for terms related to “banking crisis” jumped in early March, but have also fallen again. It is hard to say why people are so blasé. Perhaps after the past years of pestilence and war, ructions in the banking industry seem like a walk in the park. Or perhaps people think governments will step in to protect them.
Many economists worry more about the second problem: credit. If firms cannot get their hands on finance, they cannot grow so easily. On March 22nd Jerome Powell, chairman of the Federal Reserve, referred to a “very large body of literature” when asked about the connection between tighter credit conditions and economic activity. In the years after the global financial crisis of 2007-09, broken credit markets held back both short-term economic recovery and long-term productivity growth.
After the collapse of svb, capital markets essentially froze. From March 11th-19th American corporations issued no new investment-grade bonds, having issued a daily average of $5bn in January and February. This caused consternation. But fewer people noticed that the market has since picked up. In recent days Brown-Forman, which makes Jack Daniel’s whiskey among other tipples, and NiSource, a big utility firm, have raised large amounts of money in debt markets. Although spreads on corporate bonds rose a little after the collapse of svb, they too have fallen back in recent days. Companies may have briefly held off issuing new debt to check that the coast was clear. It seems likely that March 2023 will turn out to be a fairly average month for corporate-debt issuance.
Damage to the banking system will almost certainly prove more consequential. Since the start of March global banks’ share prices have tumbled by a sixth. Academic evidence suggests that falling share prices tend to hit loan growth. Banks may also cut back on lending if they see deposit outflows, or if they need to raise capital because investors doubt their safety. Indeed, banks across the rich world already appear to be tightening standards. The hit to bank lending implies a growth drag of around 0.4 percentage points in both America and the euro area, according to a new paper by Goldman Sachs. The turmoil may have hit American banks harder, but the euro-zone economy is more dependent on bank lending. That could cut global growth yet further, from 2.5% to something more like 2%.
Although the recent banking turmoil is hardly good news, it is unlikely to push the world economy over the edge. True, things could yet deteriorate. The discovery of another rotten bank could cause a downward spiral. Banks will take time to rebuild balance-sheets and get lending. Rising interest rates will continue to impede growth until central bankers judge their work done.
But there are forces working in the other direction, too. One is the rebound of China. Economists expect the world’s second-largest economy to have grown by over 7% year on year in the second quarter of the year. Meanwhile, supply-chain bottlenecks have mostly disappeared and energy prices have fallen. Do not be surprised if the world economy’s unusual resilience continues. ■
Source: Finance - economist.com
