The Economy Will Crash As Bank Turmoil Causes a Credit Crunch: Allianz

• The US economy is going to crash-land into a recession in the second half of 2023, according to Allianz.
• The German insurance-to-asset management giant predicted US output will shrink 1% between mid-2023 and year-end.
• “Rapidly tightening credit conditions, exacerbated by the banking crisis” will fuel the downturn, Allianz said.

Brace for the US economy to flounder in the second half of this year because the turmoil in the regional banking sector is going to trigger a credit crunch, Allianz has warned.

The German insurance-to-asset management giant said in a report this week that the US is “headed towards a crash landing,” referring to an outcome where the Federal Reserve’s monetary tightening and banks’ increased wariness toward lending squeeze credit flows and set the stage for a recession.

“We expect the economic momentum to deteriorate during the second half of the year on the back of rapidly tightening credit conditions, exacerbated by the banking crisis,” a team led by Allianz’ chief economist Ludovic Subran said in the note.

The strategists added that they are “penciling in a recession” that would see the US economy contract 1% between the middle and the end of this year.

Allianz is expecting the turmoil that’s rocked the US’s regional banks in recent weeks to fuel a credit crunch.

Silicon Valley Bank collapsed earlier this month after it disclosed massive losses on its bond holdings, leading to customers like Peter Thiel’s Founders Fund pulling their deposits. Two other US lenders – Signature Bank and Silvergate Capital – also imploded this month.

That’s spread shockwaves across the financial system and dragged on the share price of other regional lenders like First Republic and  Western Alliance.

The turmoil could leave banks more risk-averse and result in a pullback in lending, according to Allianz. When financial institutions are less willing to lend, Americans find it harder to access credit – and that leads to a fall in spending and investment that would weigh on the nation’s overall economic health.

Subran’s team noted that a sharp drop in deposits had wiped $472 billion off the US’s total money supply over the past year – which they said “spells doom” for financing conditions.

“Banks have been curtailing the supply of credit to the private sector, and low confidence in the financial sector will likely make them even more conservative,” the strategists said.

“In post-World War II history, this is a unique event,” they added. “While credit growth has still held up, a significant decline in bank lending seems inevitable amid the collapse of monetary aggregates.”

Read more: Victims of the Fed: How a year of rate hikes cratered stocks – and fueled the demise of FTX and Silicon Valley Bank