Worries about Recession and Financial Instability Rise Globally
This month’s upheaval in the US banking sector, coupled with renewed recession fears, has significantly eroded investor confidence, marking one of the lowest points in two decades. This comes even before accounting for the collapse of Credit Suisse this week.
A monthly survey by investment bank BofA, conducted after the failures of Silicon Valley Bank and Signature Bank but prior to Credit Suisse’s takeover, revealed a dramatic increase in perceived risk levels. BofA’s “Financial Market Risk Indicator,” which measures investor anxiety, surged to 7.7, nearing last year’s extreme levels amid the Ukraine war, and surpassing the peaks observed during the global financial crisis and the Covid outbreak.
European fund managers are especially pessimistic. Although the survey closed before the Credit Suisse crisis unfolded, nearly one-third of respondents identified “systemic credit events” as the greatest risk to markets, up from just 8 per cent in February. This shift in focus pushed concerns about inflation from the top spot for the first time in nine months. The US “shadow banking” sector, particularly in light of the Silicon Valley Bank collapse, was highlighted as a significant threat.
Other research paints a similar picture. In Germany, a poll by the ZEW economic research institute showed a sharp decline in investor sentiment. ZEW President Achim Wambach stated, “The international financial markets are under strong pressure,” with high uncertainty reflected in economic expectations.
The collapse of mid-sized US banks like Silicon Valley Bank (SVB) and Signature Bank, followed by the 167-year-old Credit Suisse’s downfall, has intensified concerns about potential future bank crises. BofA’s survey also indicated a rise in fears over recession and stagflation.
More than half of the 212 global funds surveyed foresee weaker global growth, and while 84 per cent expect lower inflation, 88 per cent now predict stagflation — a scenario of slow growth coupled with high inflation — will be the most likely macroeconomic outcome within the next year. Among European money managers, 61 per cent predict a regional recession in the next 12 months, an increase from 55 per cent in February. Similarly, 42 per cent of respondents anticipate a global recession, up from 24 per cent the previous month.
