CDI Economic Summary: US regional banking crisis lowers odds of soft landing
NEW YORK (ICIS)–The failure of two sizeable banks (Silicon Valley Bank and Signature Bank) in the US and the crisis of confidence contagion spreading to other regional banks and now European financial institutions threatens to significantly tighten lending conditions at the very least, further slowing economic growth and potentially tipping US and European economies into recession.
The implications for the economically sensitive chemical industry are huge, as a major step down in GDP growth or a contraction would crater demand in an already weak environment.
The US regional banking crisis reduces the odds of a soft landing, and our base case is still a mild recession lasting two to three quarters. Stabilising the financial system will be critical to keeping the downturn mild.
The emergency takeover of Credit Suisse by UBS at the behest of the Swiss government highlights the inherent risks to the global economy from banking contagion.
The US Federal Reserve raised interest rates at a record pace through 2022 to tamp down runaway inflation. The result has been a collapse in the value of long-term Treasuries and other long-duration debt such as mortgage-backed securities (MBS) that banks accumulated on their books. In a bank run, banks must sell these securities at big losses to cover outflows.
The Fed, Treasury, and Federal Deposit Insurance Corporation (FDI)C stepped in on 12 March with a strong move to halt a run on regional banks, guaranteeing all deposits at the two banks above the protected $250,000 threshold.
The Fed also created a new lending facility to boost liquidity where banks can pledge debt securities as collateral at par (face value), even if the value of those securities may be far lower.
Yet without an explicit guarantee that all uninsured bank deposits (those over $250,000) will be safe, it’s hard not to believe large depositors, including businesses, will continue to take funds out of smaller regional banks and put them into the ones deemed “too big to fail”.
Meanwhile, the latest economic data from the US shows weakening consumer spending and inflation at the producer level.
Retail sales fell by 0.4% month on month in February, while the Producer Price Index (PPI) fell by 0.1%. Yet the key Consumer Price Index (CPI) was up by 0.4% in February from January and up by 6.0% year on year.
The core CPI (excluding food and energy) being up 5.5% from last year is still well above the Fed’s 2% inflation target.
The Fed on 22 March raised rates by another 0.25 percentage points and softened its stance towards further hikes in the light of uncertainty amid the regional banking crisis. The Fed remains undeterred in its goal of bringing inflation down to its 2% target.
Fed chair Jerome Powell acknowledged that the banking turmoil will likely tighten credit conditions, but added that it is too early to tell the extent of the impact.
GROWTH SLOWLY RISING
ICIS expectations for US GDP growth are at around 0.6% in 2023 and 0.7% in 2024. Global GDP is forecast to grow at 1.8% in 2023, rebounding to 2.8% in 2024.
The US industrial sector is already taking a hit, with the latest ISM US Manufacturing Purchasing Managers’ Index (PMI) in contraction (below 50) in February for the fourth consecutive month at 47.7. However, the Services PMI remains strong, with the February reading at 55.1.
The labour market continues to show resilience, with unemployment ticking up slightly to 3.6% in February. Wage gains have moderated, providing some relief on the inflation front.
Meanwhile, the ICIS US Leading Business Barometer (LBB) rebounded in February after 11 months of decline but is still signalling recessionary conditions. Even as interest rates are poised to decline heading into a recession, tighter credit conditions will continue to weigh on the key housing and automotive end markets.
ICIS projects that US housing starts will plunge by 19% to 1.26m in 2023. While light vehicle sales are expected to rebound by 7% to 14.7m units this year on easing supply-chain constraints, they will remain far below the pre-pandemic 2019 level of 17.0m.
Additional contribution from ICIS senior economist Kevin Swift
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