➤ The likelihood of a recession has eased, signaling a changing outlook for the US economy.
➤ Recent bank failures are a normal part of a cycle of rising rates but do not indicate a sector facing systemic risk.
➤ The resolution to the debt ceiling debate is crucial to the forecast of baseline scenarios for the US and global economies.
The prospects of a recession in the US have eased thanks to stronger economic data, and recent failures of several regional banks are not indicative of "systemic" risk to the sector, credit and risk experts said during a May 16 S&P Global Market Intelligence webinar.
"It looks right now like we might avoid a recession," said Jonathan Ablett, executive director of global economic modeling and scenario design at Market Intelligence. But while a recession may be less likely, as indicated by improved economic data, the economy could be in for a period of below-trend growth where unemployment is low, inflation is high and interest rates remain higher for longer than expected.
Different macroeconomic trends can have varied impacts across different industries and geographies. The recent banking turmoil has affected not only the banking sector but also utilities and real estate to varying degrees across geographies, said Hrvoje Tomicic, a credit product specialist at Market Intelligence.
Even establishing baseline scenarios can be complex in such a volatile context since macro variables are not the only thing in flux, Tomicic added.
Access a replay of the webinar
Banking risk not 'systemic'
Individual bank failures, such as what happened to Silicon Valley Bank, are to be expected during a cycle of rising rates, according to Ablett.
"We don't see anything that's systemic. ... This is not an asset-quality issue yet; it is primarily a liquidity issue," Ablett said, adding that the Federal Reserve put measures in place that should guarantee the liquidity of US banks for at least a couple of years.
"They've effectively inoculated the markets from some of the liquidity concerns, but we are still seeing pressure on equity markets for some of these smaller banks," Ablett said. "If we are thinking about PacWest Bancorp, they have plenty of capital, their capital adequacy ratios are fine, they're stronger ... now than they were before the global financial crisis."
Debt ceiling looms
In the near term, the debt ceiling debate in Congress is "top of mind," said Ablett.
A repeat of the 2011 scenario is "close to our baseline," according to Ablett. Back then, an agreement was eventually reached between members of Congress and then-President Barack Obama just prior to the deadline but not before S&P Global Ratings downgraded the nation's debt rating.
The US has the means to pay its debts, but it might need to postpone or restructure payment on some of its debt if an agreement is not reached, which would mean going into technical default. In that case, the government would need to cut discretionary spending, which would affect the GDP and the economy.
"We are not far from a technical default," Ablett said.
The third scenario, which is the least likely, is a full sovereign default. That would "convulse markets in ways that we are probably not prepared [for]," Ablett said.
