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”.
DOWNBEAT DATA
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
