Recession risks re-ignited by banking crisis: Economy news

  • This weekly round-up brings you the latest stories from the world of economics and finance.
  • Top economy stories: Banking crisis sparks recession fears; World Bank warns of ‘lost decade’ of global growth; Generative AI could create productivity boom and lift global GDP by 7{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502}, says Goldman Sachs.

1. Banking crisis sparks recession fears

Recession risks have been re-ignited by the recent banking collapses and rescue deals, and there are now concerns that global growth will weaken as the crisis heralds the end of the “easy-cash era” and the arrival of a credit crunch.

“There is a sizeable risk that the ongoing banking trouble triggers a ‘sudden stop’ in lending, which would then send the economy into the sort of recession which would go beyond what is strictly needed to tame inflation,” AXA Investment Managers Chief Economist Gilles Moec told Reuters.

The race to raise rates

Rapid tightening of monetary policy is producing economic pains.

Image: Reuters

He has noted that small and big US banks are borrowing heavily and holding onto cash. Central bankers are closely monitoring the potential for a credit crunch, with one European Central Bank official flagging a possible tightening in lending.

Global bank stocks are down nearly 15{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} this month. And companies in sectors sensitive to the growth outlook – such as real estate and oil and gas – are now slipping on stock markets.

Economically sensitive sectors falter

Sectors sensitive to the weaker growth outlook are slipping on stock markets.

Image: Refinitiv

At the same time, consumers and companies are facing increased pain from rising interest rates. Ratings agency S&P expects US and European default rates to reach 3.75{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} and 3.25{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502}, respectively, by September, more than double the 1.6{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} and 1.4{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} seen in September 2022. Pessimistic forecasts of 6.0{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} and 5.5{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} are not “out of the question”, it says.

Corporates have higher levels of borrowing now than during the great financial crisis, says Deutsche Bank Strategist Jim Reid.

2. World Bank warns of ‘lost decade’ of global growth without bold policy shifts

The global economy faces a “lost decade” unless policy-makers adopt ambitious initiatives to boost labour supply, productivity and investment, the World Bank says. It estimates that average potential worldwide economic growth will slump to a three-decade low of 2.2{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} per year through to 2030 without big policy changes.

Failure to reverse this expected slowdown would have profound implications for the world’s ability to tackle climate change and reduce poverty, the bank said in a new report called Falling Long-Term Growth Prospects: Trends, Expectations, and Policies.

Global economic growth is slowing down

More countries are facing slower economic growth.

Image: World Bank

“Nearly all the economic forces that powered progress and prosperity over the last three decades are fading,” the bank says. But it adds that a concerted effort to boost investment in sustainable sectors, cut trade costs, leverage growth in services and expand workforce participation could boost potential GDP growth by up to 0.7 percentage points to 2.9{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502}, according to the report.

The World Bank is also watching developments in the banking sector, which come as rising interest rates and tightening financial conditions drive up the cost of borrowing for developing countries, says Ayhan Kose, Director of the bank’s forecasting group.

Economic growth around the world

Economic growth is below where it was two decades ago.

Image: World Bank

“The slowdown we are describing … could be much sharper, if another global financial crisis erupts, especially if that crisis is accompanied by a global recession,” Kose says, noting that recessions could weigh on growth prospects for years.

3. News in brief: Stories on the economy from around the world

Generative AI such as ChatGPT could lead to a productivity boom that would lift global GDP by 7{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} within 10 years, according to a Goldman Sachs report. However, artificial intelligence could also create “significant disruption” in the labour market, putting 300 million jobs at risk worldwide.

China’s Premier, Li Qiang, says he is committed to opening up the world’s second-largest economy and delivering reforms that can help stimulate growth. He said geopolitical tensions would only hold back development worldwide. “We will introduce a series of new measures in expanding market access and optimizing the business environment … Peace is a prerequisite for development.”

The US’ sovereign credit profile should face only limited risks from the country’s banking crisis, according to ratings agency Moody’s. However, it says that prolonged stress in the sector could impact the country’s economic and fiscal strength.

Portugal is rolling out a $2.7 billion plan to help low-income families cope with soaring inflation and high interest rates. It is also scrapping value-added tax of 6{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} on 44 essential food products, but is facing criticism that this measure is not enough to help consumers.

Canada’s budget also contains a “grocery rebate” for 11 million low-income households. The budget also looks to help Canada compete with the United States in the low-carbon economy, including through a series of green investment tax credits worth C$35 billion ($26 billion).

Egypt is coming under pressure to devalue its currency after its value slid on the black market. The central bank has already sharply devalued the Egyptian pound three times since Russia’s invasion of Ukraine in February 2022. Inflation is at a five-and-a-half-year high of 31.9{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} and Egypt’s heavy foreign debt liabilities include $3.5 billion in repayments for IMF programmes due by the end of this year.

Russian President Vladimir Putin says that record-low unemployment and marginally higher real wages are evidence of a gradual economic recovery in the country. However, data showed that Russian consumer demand fell 7.8{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} and industrial output dropped 1.7{515baef3fee8ea94d67a98a2b336e0215adf67d225b0e21a4f5c9b13e8fbd502} in February.

A total of 22 developing countries were bailed out by China between 2008 and 2021, according to a report by researchers from the World Bank, Harvard Kennedy School, AidData and the Kiel Institute for the World Economy. China spent $240 billion on the bailouts, with the amount soaring in recent years as more countries struggled to repay loans spent building infrastructure for Beijing’s “Belt and Road” initiative, the report says.

4. More on finance and the economy on Agenda

The IMF has launched a voluntary Central Bank Transparency Code to try and reinforce trust in central banks. It is a set of principles covering mandates, functions and operations, and is designed to improve transparency and accountability.

What is a country’s current account balance, and is a deficit good or bad for its economy? This blog looks into the elements that make up a current account balance, and which countries have the biggest deficits and surpluses.

While digitalization has proved to be a silver lining of the pandemic for many advanced economies, gaps persist across countries and sectors, say IMF researchers. Here, they outline the far-reaching and long-lasting implications of greater digital tech adoption for productivity and labour markets.

Francis McGee

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