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Credit crunch, not systemic banking crisis, to underpin downturn

By Charbel Kadib
5 minute read

Tighter credit conditions are set to underpin a broad slowdown in global economic activity, Oxford Economics has said after downgrading its forward projections.

Oxford Economics has updated its outlook for the global economy, maintaining its projections for growth of just 1.9 per cent in 2023 but downgrading its expectations for 2024 — down from 2.5 per cent to 2.2 per cent.

The group said recent volatility in the global banking system — sparked by the collapse of three US banks and the demise of Swiss giant Credit Suisse — could “trigger a chain reaction of events”, which “plunges the global economy into recession”.

However, the group claimed a systemic banking crisis was unlikely, instead attributing expected weakness to a looming credit crunch, largely the result of rapid monetary policy tightening aimed at curbing inflation.


“The main channel via which we expect problems in the banking system to spill over to the global economy is tighter credit conditions for businesses and consumers,” Ben May, director of global macro research at Oxford Economics, said.

“We expect this would have a relatively larger impact on investment, albeit most likely with a lag of two to three quarters.”

Tighter credit conditions are tipped to take at least six months to filter through to global economic activity, reflected by key indicators at the back end of 2023 and the first half of 2024.

“As a result, the biggest downward revisions to our calendar year GDP growth forecasts are to 2024 rather than 2023,” Mr May added.

Investment activity would “bear the brunt” of the credit crunch, with consumer spending to remain somewhat resilient.

“After all, households in aggregate are still sitting on a large cushion of excess savings,” he said.

“Outright falls in capital spending aren’t expected. Indeed, after four years of volatile but mediocre investment, we still expect the underlying pace of expansion to pick up a bit.”

Negative wealth effects could also contribute to a global economic slowdown, with tighter credit conditions impacting equity markets and property prices, particularly commercial real estate.

“Commercial real estate is a key area to watch because the expected weakness in the sector may undermine the strength of the wider economic recovery next year,” Mr May said.

“Commercial real estate prices are typically sensitive to changes in bank lending conditions. Weaker commercial property prices could trigger a rise in bad loans to the sector or reduce firms’ collateral for lending, which would exacerbate the expected hit to investment.”

Oxford Economics is projecting a 10 per cent fall in all property capital values across the US and Europe in 2023, followed by a 5 per cent decline in the US over the course of 2024.

“Overall, we have made broad-based downward adjustments to our GDP forecasts for advanced economies,” Mr May added.

“But we also believe recent events will only temper the global economic recovery, rather than cause it to stall.”

Oxford Economics’ updated global growth projections follow a revision from the International Monetary Fund (IMF), which is now anticipating world output of 2.8 per cent in 2023 before picking up to 3 per cent in 2024.

The fund’s January projections had forecast global output of 2.9 per cent in 2023 and 3.1 per cent in 2024.

According to the IMF, the revision reflects slimmer hopes of a “soft landing”, with inflationary pressures persisting despite aggressive monetary policy tightening across advanced economies.

“Although inflation has declined as central banks have raised interest rates and food and energy prices have come down, underlying price pressures are proving sticky, with labour markets tight in a number of economies,” the IMF observed.

Adding to expectations of a harder landing is financial system vulnerability exposed by sharp interest rate rises, with the IMF pointing to “turmoil” across the global banking sector.

“Side effects from the fast rise in policy rates are becoming apparent, as banking sector vulnerabilities have come into focus and fears of contagion have risen across the broader financial sector, including non-bank financial institutions,” the fund added.

Oxford Economics’ chief global economist, Innes McFee, described the IMF’s projections as “too sanguine”.

He said the IMF’s focus on market interest rates clouds its expectations, with modelling pricing in monetary policy easing later this year.

“We think that stubbornly high inflation will keep policy rates high for the rest of this year,” Mr McFee added.

“This could explain why the IMF expect a more muted impact from tighter financial conditions in advanced economies.”

As in the IMF’s previous global economic outlook report, China and India are tipped to drive global growth in the coming years.

The Chinese economy is projected to grow 5.2 per cent in 2023 and 4.5 per cent in 2024, while the Indian economy is expected to expand 5.9 per cent and 6.3 per cent, respectively.

Overall, emerging markets are expected to outperform advanced economies, with growth of 3.9 per cent in 2023 and 4.2 per cent in 2024, compared to 1.3 per cent and 1.4 per cent over the same period.

Credit crunch, not systemic banking crisis, to underpin downturn

Tighter credit conditions are set to underpin a broad slowdown in global economic activity, Oxford Economics has said after downgrading its forward projections.

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