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Global monetary tightening putting pressure on global trade and insolvencies
- Against the background of monetary tightening to fight inflation, pressure has built up in the banking system. Some of the pressure came abruptly to the surface at the end of Q1 2023, with prompt responses by local authorities.
- In the US, Silicon Valley Bank (SVB), a 40-year-old bank serving the technology sector reported on March 8 that it would lose more than $2 billion in equity, in part to cover bond losses. That triggered a withdrawal of deposits worth $42 billion, a quarter of its total.
- In Europe, Credit Suisse troubles came to the surface on March 15, when Saudi National Bank ruled out any further investment in the firm. The share price plunged to its lowest level ever, with other European banks taking a hit as well. UBS purchased Credit Suisse at a 60 percent discount, backed up by CHF 100 billion liquidity support from the Swiss National Bank.
- The risk of a large-scale banking crisis remains minimal, mainly due to the stronger overall capital position of banks since the Global Financial Crisis, thanks to regulatory reforms.
- As banks continue to face risks of share price declines and losses on the assets side of the balance sheet, their lending will be constrained, which implies less investment and economic growth in the business environment as well as less consumption of durable goods. Risk mitigation tools such as credit insurance are expected to continue to be crucial solutions to support trade finance.
Share prices in European and US banks have declined
Shares banks base, 1998 = 100
Source: Macrobond
GDP YoY variance: Lower growth and high recession risks
Source: Refinitiv, Datastream, Allianz Research
- While the rate of slowdown in demand is not deteriorating further, there are at this stage no signs of an imminent recovery. Even if inflation seems to have peaked and interest-rate hiking cycles are likely to soon come to an end, the real economy has not fully digested their negative impacts yet.
- Global demand in Q2 2023 indicates better performance than previously expected, mostly driven by (consumer) services, with limited buoyancy for global trade.
- The global manufacturing sector is still facing weak demand and oversupply, depressing trade flows for goods which went back to the level of October 2021.
- Global supply chains and container freight rates continue to normalize. Replenished inventories, increased production capacities, and weakening demand mean that global manufacturing has overall been rid of supply-chain disruptions and input shortages since the second half of 2022.
- Trade recession continues to be expected and risks are likely on the downside of global trade forecasts for 2023 and 2024.
- The rebound in business insolvencies is picking up speed: The Allianz Global Insolvency Index is set to leap by +21 percent in 2023 and +4 percent in 2024. Half of the countries are likely to exceed their pre-pandemic levels of insolvencies in 2023, and three out of five in 2024.
- Lower growth in 2023 and 2024 will have significant impact. It is estimated that the Eurozone and the US would need 1.3pp and 1.5pp of additional GDP growth on average in 2023-2024 to stabilize the number of insolvencies. The number of insolvencies for firms with more than €50m in revenue is now slightly above pre-pandemic levels (construction, retail and services most affected).
- Prolonged pressure on profitability, weaker cash buffers and tighter-for-longer financial conditions are testing the resilience of the most fragile companies. Cash continues to be a significant focus, but credit management practices have deteriorated according to latest Allianz data around working capital requirements.
- The recent banking turmoil has been a stark reminder of 2008-9 when the financial crisis acted as a massive catalyst for insolvencies. The five major factors that can put a company in trouble are: i) decrease in turnover, ii) difficulty to access credit, iii) regulatory changes for banks, iv) currency volatility and v) supply chain disruptions.
Allianz Trade insolvency indices increasing, basis 100 in 2019
Source: Allianz Research