Foggy Forecast for Sachs
Goldman Sachs has lowered its 2023 economic growth forecast by 0.3 percentage points to 1.2% due to a pullback in lending from small- and medium-sized banks amid turmoil in the broader financial system. The move comes as smaller banks attempt to preserve liquidity in case they need to meet depositor withdrawals, leading to a substantial tightening in bank lending standards. This could hurt GDP growth, which is already affected by tightening in recent quarters. While the recent bank failures of Silicon Valley Bank and Signature Bank account for just 1% of total bank lending, Goldman noted that lending shares are 20% for banks with a high loan-to-deposit ratio and 7% for banks with a low share of FDIC-insured deposits.
Regulators have seized both banks earlier this week and have ensured that depositors will regain full access to their funds through the FDIC’s deposit insurance fund. Goldman Sachs economists assume that small banks with a low share of FDIC-covered deposits will reduce new lending by 40% and that other small banks will reduce new lending by 15%, leading to a 2.5% drag on total bank lending. The tightening effect would have the same impact on demand growth as an interest rate hike of 25 to 50 basis points, according to Goldman economists David Mericle and Manuel Abecasis. What do you think about this update? And where will the economy be heading in the next six months?
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I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.