In the Oscar-winning movie, an unlikely hero fights strange, seemingly never-ending dangers as the fate of the world hangs in the balance. In our reality, the frequency of new events chasing each other has exploded. Financial markets can’t escape this trend. There’s no one hero to save us. And the fight will be fought for many more years.
The frequency of new events chasing each other has exploded, so why would the supposedly efficient and highly communicative financial markets escape this trend? They haven’t, as we’ve all seen in the recent market turbulence and the forced marriage between Credit Suisse and UBS. What’s clear is that the frequency of crises has become mind-blowing in recent years: the pandemic, lockdowns, war and now, banking turmoil. Everything, everywhere, almost at once.
Even if the financial sector as a whole looks more resilient and the toolkits of supervisors, governments and central banks are larger than 15 years ago, there is no reason for complacency. We remain on high alert. The coming months could still show further cracks, either in the financial sector or the real economy, or, even worse, in both.
We expect the Fed and the ECB to stop hiking interest rates before the summer. A recession in the US will force the Fed to significantly cut rates towards the end of the year, while stubbornly high core inflation will bind the ECB to a “high-for-longer” stance until mid-2024. Read Carsten's full analysis.
Our base case for the economy
Our existing base case was already more cautious than consensus and factored in the adverse impact of the rapid monetary policy tightening so far. It was clear that at some point, something would break, be it something in the real economy or in financial stability. Recent developments have strengthened our base case scenario of a recession in the US and subdued growth in the eurozone.
Until last month, the main drivers of our different scenarios had been energy prices and monetary policy, while now it's credit conditions or lending standards as well as the health of corporate balance sheets.
The prospects of a technical recession have increased again in the eurozone on the back of even tighter credit conditions. While risk-free interest rates have actually dropped, bank lending rates are likely to increase further, potentially hampering investment. Corporates tapping bond or equity markets could be an alternative for bank funding, but given the eurozone’s high reliance on banks, this is still unlikely to be a big game-changer. Some financial stress could actually help bring down inflation faster than expected but too much financial stress would push the eurozone into recession. Up to now, risks of a return of the euro crisis have remained muted. However, in the case of longer-lasting financial stress, the likelihood of yet another euro crisis clearly increases.
In the US, higher borrowing costs and reduced access to credit mean a greater chance of a hard landing for the US economy. This will help to get inflation lower more quickly than would otherwise have happened. Rate cuts, which we have long predicted, are likely to be the key theme for the second half of 2023, and we are favouring 100bp of easing in the fourth quarter of this year.
Read more about what ING’s analysts are predicting for the global economy.
Our view on the major central banks
We think the US Federal Reserve will hike rates once more while we could see two more increases from the European Central Bank before the summer. On the other hand, we're expecting the Bank of England to pause. Read more about ING's major central bank forecasts.
Read more April economic news from ING THINK.