Will The Recent Banking Chaos Lead To An Economic Crash?

How quickly things change. A few weeks ago analysts were convinced the global economy was powering ahead. Now they worry about a deep recession caused by fallout from the collapse of Silicon Valley Bank (SVB) and the rescue of Credit Suisse.

"From no landing to hard landing", as Torsten Slok, an economist at Apollo Global Management, an asset manager, has written. Analysts at JPMorgan Chasebetter at economics than metaphors, one hopes say that "a soft landing now looks unlikely, with the airplane in a tailspin (lack of market confidence) and engines about to turn off (bank lending)".

Evidence from before the recent banking chaos suggested that global GDP was increasing at an annualised rate of around 3%. In rich countries, job markets were on fire. So far there is scant evidence of a shift in "realtime" data towards slower growth. A "current-activity indicator" produced by Goldman Sachs, a bank, derived from a variety of high-frequency measures, looks steady. Purchasing-manager indices showed a slight improvement in March.

Weekly measures of GDP produced by the OECD, a rich-country club, are holding up. UBS, another bank, tracks global GDP growth as priced by financial markets (in prices of oil and cyclical shares, for example). This currently indicates growth of 3.4%, versus 3.7% before SVB collapsed.

It is still early days. The pain may be on the way. And as the JPMorgan analysts illustrated with their metaphor, economists have two worries. The first is uncertainty. If people fear a banking crisis and the accompanying economic pain, they may cut consumption and investment. The second relates to credit. Financial institutions, fearing losses, may pull back on lending, depriving firms of muchneeded capital. Fortunately, though, there is reason to believe that the recent banking turmoil will have less impact than many fear.