Economies and labor markets have held up better than expected, while inflation remains higher and more persistent than central banks would like. The economic state is clear for the main developed markets. In response, the main central banks have raised interest rates several times in the last quarter and, although this has hampered the performance of some stock markets, we have not yet seen a sell-off.
That being said, signs of weakness are appearing. Manufacturing PMIs around the world have been below 50 points of contraction, while inventories have built up in both the US and Europe, pointing to lower final demand.
Much of the growth has been in the services sector, thanks in part to the late impact of the pandemic, although this effect is waning. Loan growth is weakening in several places, as the effects of rising rates and bank failures begin to feel.
China’s growth also appears to be slowing a bit faster than many expected, though the outlook for the year remains strong compared to most others. And what is more worrying, prices throughout the economy have plunged into deflation, with an annual rate of producer prices close to -5% and consumer prices practically flat compared to a year earlier.
“Overall, the outlook remains rather murky,” explains Shamikir Dhar, chief economist at BNY Mellon IM. A situation that causes a black swan called a “credit crunch” or credit crisis to appear, derived from this monetary tension, to which the expert gives a 40% probability that it will end up curdling due to some arguments that must be taken into account. .
“The case for a ‘credit crunch’ this year remains the same…big,” says Dhar.
In this line, although it is more of a movement than a flight, the bankruptcy of the First Republic Bank has shown that the problem has not disappeared. Smaller regional banks account for around 40% of total bank loans in the North American country and disproportionately finance SMEs and commercial real estate.
“Clearly the largest banks and the broader capital markets can shoulder some of the burden, but probably not most of it,” says Dhar. Hence what economists call the “bank lending” channel – a sharp increase in the cost of capital mediated by the banking sector – is likely to hit the economy in the second half of this year.
And, although I haven’t seen much evidence of it yet, that impact could be verified by the Banking one (“The Banks Threaten Your Net Worth And Ability To Grant Loans”), as well as by the traditional “credit channel”.
“In reality, the probability of a credit crunch is probably higher in the United States, but many countries share the problem of persistently above-target inflation at the current level of interest rates,” highlights the US manager’s expert.
The possibility of late landing
The “delayed landing” scenario for the US economy would also face other problems. Unlike the Credit Crunch Scenario, if Rising Interest Rates and Tightening Conditions Are Unsuccessful in Significantly Slowing the Economy in the Second Half, Interest Rates May Be Much Higher in Several Countries.
For Dhar, Essentially, The Political Mistakes Made By Central Banks In The Past (Leaving Rates Too Low For Too Long) BECOME THEIR Counter Ra, And Rates Need To Rise Much Higher For Longer To Control The Fallout Of Inflation. “In the UK and to some extent in the US, clear ‘second round effects’ are emerging, both in product markets (food retailers for example) and in labor markets, and these will need to be combated first. that inflation expectations are destabilized,” he warned.
Ultimately, in this world that can only happen if interest rates rise enough to create the economic slack to reduce inflation enough. “That could well mean a second leg of rate hikes later this year, followed by a recession in 2024. The US and UK are the most vulnerable countries. In other words, it could produce, in his opinion, added monetary tension.
“Our two recessionary scenarios reflect the standard model: that an inflationary surprise ultimately has to be dealt with by creating large amounts of economic slack to get it back on target… We continue to think the economy is unlikely to perform positively ”, he concludes.
