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    RESEARCH  |  3 POINT PERSPECTIVE  |  MACRO SHIFTS

    Q2 2023 Global Outlook: This too shall pass

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    Contributors: Ajay Rajadhyaksha & Amrut Nashikkar

    30 Mar 2023

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    Fears of a systemic banking crisis are overblown. But the effects of interest-rate hikes and tighter credit conditions should tip the West into contraction from the third quarter, according to our Research analysts.

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    Contributors: Ajay Rajadhyaksha & Amrut Nashikkar

    30 Mar 2023

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    Living with shock and awe
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    GO TO SECTION

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    1. This is not a re-run of 2008

    Banking troubles in the US and Europe are not a harbinger of a serious financial crisis. Banking systems collectively have lots of capital, policymakers have been quick to open liquidity spigots when needed, and our analysts see few problems with overall asset quality.

    It is true that US regional banks seem vulnerable to deposit flight, but that is not a system-wide phenomenon, especially with depositors in Silicon Valley Bank and Signature Bank made whole. Furthermore, broader financial markets have mostly kept their poise. The S&P 500 went up the week after the collapse of SVB in mid-March, even as bank credit spreads widened sharply. There are few signs of funding pressures in USD money markets. And it is notable that the euro strengthened against the dollar over the month. That is not normally what happens in periods of true fear.

    2. But there will be lasting effects from recent events

    US banks with under $250bn in assets are big drivers of loan growth in the US, supplying about $550bn of loans last year, or a little over 2% of US GDP. Such banks are likely to curtail lending as they worry about the stability of their deposit bases. That contraction in credit should hit small and medium-sized businesses in particular.

    Banks everywhere will likely have to raise deposit rates, pushing up their cost of funding. That should show up in higher rates for lending. Bigger banks will surely note the swift demise of Credit Suisse, a systemically important bank that was over-capitalised, according to its own regulator. They are likely to turn more conservative on loan growth too. Finally, there are the lagged effects of past interest-rate hikes that should continue to ripple through economies.

    3. That won’t be enough to spark a rate-cutting cycle in 2023

    Investors are likely to be disappointed if they expect the Federal Reserve and the European Central Bank to cut interest rates aggressively in response.
    Of course, no policymaker would want the kind of serious collapse in demand that would accompany a widespread banking crisis. But both central banks have been trying to slow their economies down, in the wake of strong momentum on growth and inflation in the first quarter. A credit-driven downturn is unlikely to faze them, in that context.

    Our global growth forecast for 2023 (2.7%) is stronger than at the time of our previous quarterly in November 2022 (1.7%), thanks to resilient recent activity and upside from China and India. Given this growth profile, our analysts expect annualised core inflation in both the US and the euro area to be near 3% in the fourth quarter. That is a welcome and substantial drop from current levels, but still far enough from targets to make rate cuts unlikely this year.

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    About the experts

    Ajay Rajadhyaksha

    Global Chairman of Research

    Ajay Rajadhyaksha is Global Chairman of Research at Barclays, based in New York. He drives the global macro research and strategy effort including economics, rates, FX, commodities, emerging markets, and asset allocation. Since joining Barclays in 2005, Ajay has held various positions, including Head of Macro Research, Co-Head of FICC Research and, before that, Head of US Fixed Income Research and US and European Securitised Research.

    Amrut Nashikkar

    Managing Director, Fixed Income Strategy

    Amrut Nashikkar is a Managing Director in the Fixed Income Strategy team at Barclays based in New York, covering interest rate derivatives with a focus on interest rate volatility and the Libor transition. Amrut joined Barclays in 2008 from Lehman Brothers, where he was an interest rate strategist. Prior to that, he taught at New York University, where he graduated with a PhD in finance. He also holds a management degree from the Indian Institute of Management, Ahmedabad, and an undergraduate degree in engineering from the Indian Institute of Technology, Kharagpur.

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