Inflation continues to moderate in multiple regions and countries but remains high, and central banks look set to maintain a path of interest rate interventions. However, interest rates and sentiment are weighing on growth projections and the picture is somewhat patchy, with growth in some emerging economies such as China and India outpacing developed economies. In developed economies, the United States saw the Federal Reserve revise down its latest economic growth projections for 2023 and 2024 to 0.4% and 1.2%, respectively. In Europe, the International Monetary Fund has reconfirmed previous projections for 2022’s growth rate at 3.5% but revised up its 2023 outlook by 0.1 percentage point, a less optimistic view (at 0.2 percentage points lower) than the European Central Bank’s March figures (Exhibits 1 and 2).
Interest rate rises have also resulted in volatility in the banking sector. Rising rates have seen existing holdings of government bonds fall in value, leaving smaller banks especially vulnerable as the value of their assets drops, potentially generating losses when they have to sell these securities. In March, swift action by banking authorities and the wider banking sector prevented potential contagion across the global banking system following the collapse of Silicon Valley Bank (SVB) and Signature Bank in the United States, and the distressed sale of Credit Suisse in Europe.
However, ratings agencies also downgraded the credit rating of a third medium-size bank, San Francisco-based First Republic, citing a surfeit of uninsured deposits. In April, fears of a resurgence in banking turmoil were reignited as shares in the bank, known for catering to high-net-worth individuals, lost more than half their value on news that customers had pulled more than $100 billion in deposits. Customers with large balances were concerned their funds would not be covered in full by the Federal Deposit Insurance Corporation. First Republic was taken over by JPMorgan Chase on May 1 and banking sector shares remain volatile.
This volatility in the banking sector is likely one of the factors to have affected wider economic sentiment. McKinsey’s latest snapshot of global economic conditions surveyed executives twice in March: immediately before the upheavals in the banking sector, starting with the closure of SVB, and then again three weeks later. In early March, respondents were more positive than they had been in several quarters: 40% said that global economic conditions had improved in the previous six months, the first time in a year that respondents were more likely to report improvements than declines. And 45% said that they expected global conditions to improve in the months ahead, while only 28% predicted that conditions would worsen. However, by the end of the month, that optimism had fallen away. Respondents were much less positive than they were in early March about current global conditions and the global economy’s prospects—though they were still more upbeat than they had been in the previous quarter (Exhibit 3).
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