Banking Sector Turmoil Could Lead to Economic Recession
An economic downturn is looming as global banking crisis unfolds. Goldman Sachs on Thursday increased its odds of a recession by 10 percentage points, to 35%, and other economists are even less optimistic that the U.S. will be able to avoid an economic downturn, with those surveyed by Bloomberg putting the odds of a recession at 60%.[0] Market participants fear the U.S. may be nearing its Lehman moment yet again as panic spreads oversees to Credit Suisse, which saw its stock plunge 30% in a day after a top shareholder said it could not provide further financial support due to a regulatory limit.[1]
JPMorgan Chase & Co. estimated the US economy faces a potential hit to gross domestic product of a half to a full percentage point from diminished credit growth in the aftermath of the latest banking-sector troubles.[2] This could be a result of slower loan growth by mid-size banks, as Goldman Sachs analysts wrote that tighter financial conditions could shave half a percentage point off US growth this year.[3]
The average person’s finances were better a year or two ago than they are now, as Ted Rossman, a senior industry analyst at Bankrate.com, noted that credit card balances were 17% lower than they were prior to the pandemic, but are now up 28%.[4] The amount of debt Americans are carrying has also soared, with credit card balances increasing by $61 billion to a record high of $986 billion in the last quarter of 2022, and auto loan balances rising by $94 billion.[4] The percentage of credit card holders carrying debt from month to month has increased to 46%, up from 39% a year ago, and auto loan delinquencies have been steadily rising from their pandemic lows.[4]
Meanwhile, the European Central Bank is seen scaling back rate hikes at its meeting Thursday.[5] Further complicating matters, First Republic Bank, which was downgraded by both S&P Global Ratings and Fitch Ratings on March 15, is exploring strategic options — including a sale, according to Bloomberg.[0]
It is clear that the banking sector turmoil can tighten the credit squeeze already set in motion by interest-rate increases, potentially leading to a system-threatening bank collapse.[5] A giant bank failure, leading to a loss of credit, is the most catastrophic result that would almost certainly guarantee a recession.[2]
0. “Odds of Recession Increase 10% After Bank Failures” Yahoo Entertainment, 16 Mar. 2023, https://www.yahoo.com/entertainment/odds-recession-increase-10-bank-155731909.html
1. “The market is on the verge of Lehman-style event amid banking turmoil” Markets Insider, 17 Mar. 2023, https://markets.businessinsider.com/news/stocks/stock-market-outlook-ubs-svb-bank-crisis-lehman-art-cashin-2023-3
2. “Analysis | Behind the Banking Crisis, an Era of Easy Money's End: QuickTake” The Washington Post, 19 Mar. 2023, https://www.washingtonpost.com/business/2023/03/19/the-era-of-easy-money-is-over-what-does-that-change-quicktake/65a5f4b0-c60d-11ed-82a7-6a87555c1878_story.html
3. “A recession could come sooner on cooling bank lending” CNBC, 15 Mar. 2023, https://www.cnbc.com/2023/03/15/a-recession-could-come-sooner-on-cooling-bank-lending-.html
4. “Shrinking savings and rising debt leave consumers on shaky financial footing” AOL, 18 Mar. 2023, https://www.aol.com/news/shrinking-savings-rising-debt-leave-110511051.html
5. “Recession Fears Soar as Credit Suisse Woes Threaten Loan Crunch” Yahoo News, 16 Mar. 2023, https://news.yahoo.com/recession-fears-soar-credit-suisse-062207564.html
