Recent stress in parts of the banking sector will raise funding costs and reduce lending to many sectors. Now we expect the US economy to shrink by - 1.1% in 2023, driven by a contraction in domestic demand. Eurozone growth should stagnate amid inflation remaining high.
The recent stress in large parts of the US banking sector is significant. It adds to pressure on funding costs and profitability stemming from the fastest monetary tightening on record and the protracted period of an inverted yield curve. These stresses will constrain many banks’ ability to lend and will have a material impact on the outlook. As a result, we are revising our US forecast. We now expect a more protracted recession during the course of 2023 rather than mild weakness.
Small- and medium-sized banks account for a significant share of lending in the United States (some 40-60% of commercial real estate, residential real estate and consumer loans). These banks are under stress from deposit outflows and losses on their asset portfolios. Their ability to lend will be constrained by the inverted yield curve, with competition from higher rates on money market funds and short-maturity US Treasuries, as well as losses on low-yielding legacy assets and a higher cost of capital.
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