Allianz has warned that the turmoil in the regional banking industry will lead to a shortage of credit, which will hurt the US economy in the second half of this year.
In research released this week, the German insurance-to-asset management conglomerate said that the United States is “on the verge of a crash landing,” alluding to a scenario in which the Federal Reserve’s monetary tightening and banks’ growing wariness towards lending limit credit flows and lay the groundwork for a recession.
In a note, a group led by Allianz’s senior economist Ludovic Subran said, “We expect the economy to lose steam in the second half of the year as a result of rapidly tightening credit conditions and the banking crisis.”
The strategists also said that they are “pencilling in a recession,” with the US economy contracting by 1% between the middle and end of this year.
Allianz thinks that the trouble in the regional banks of the United States will lead to a credit crisis.
This month, Silicon Valley Bank went bankrupt after revealing that it had lost a lot of money on its bond holdings. This caused clients like Peter Thiel’s Founders Fund to pull out their investments.This month also saw the demise of two other US institutions: Signature Bank and Silvergate Capital.
This has sent shockwaves through the financial sector, bringing down the stock prices of other regional lenders like First Republic and Western Alliance.
Allianz says that the turmoil could make banks less willing to take risks, which would lead to less lending.When financial institutions are less eager to lend, Americans find it more difficult to get credit, which leads to a drop in spending and investment, weighing on the nation’s overall economic health.
Subran’s team noticed that a steep reduction in deposits had shaved $472 billion off the overall money supply in the United States during the previous year, which they claimed “spelled 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.”