Tighter lending expected to shave 0.44 percentage point off U.S. GDP in 2023, organization says

By Andrew Duehren

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 and Yuka Hayashi

Updated April 11, 2023 2:49 pm ET

WASHINGTON—Tighter bank lending prompted by the recent failure of two midsize American banks will slow U.S. economic growth this year, the International Monetary Fund estimated, warning that rising interest rates pose a threat to the global financial system.

U.S. banks’ lending capacity will decline by 1% this year due to the fall in the value of many bank stocks as investors reassess the health of midsize banks, the IMF said in a report on global financial stability released Tuesday. That reduction in lending is expected to shave 0.44 percentage point off U.S. gross domestic product in 2023, the multilateral financial organization said.

“Because regional and smaller banks in the United States account for more than one-third of total bank lending, a retrenchment from credit provision could have a material impact on economic growth and financial stability,” the IMF said.

In a separate report released Tuesday, the IMF forecasts the U.S. economy, the world’s largest, to expand 1.6% this year, down from 2.1% in 2022. The organization projected that the global economy will grow 2.8% this year, a slowdown from 3.4% last year, as nations continue recovering from slumps caused by the pandemic and the war in Ukraine.

Global growth is helped by China, the IMF said, which is reopening after its long pandemic lockdowns. But inflation in China eased for the second straight month in March, a cautionary signal on the strength of the nation’s recovery.

Risks to the global economy include the volatile banking sector, high inflation and climbing interest rates, the IMF said.

Silicon Valley Bank failed in March as depositors pulled their money out amid large unrealized losses in its long-term investments in Treasurys and mortgage-backed securities. Those assets, purchased when interest rates were very low, lost value as the U.S. Federal Reserve rapidly raised interest rates over the past year to fight high inflation.

U.S. regulators closed New York-based Signature Bank after worries of bank runs spread to other banks. Later in the month, Swiss authorities stemmed a dangerous decline in confidence in the global banking system with the forced acquisition of Credit Suisse Group AG by its longtime rival UBS Group AG.

The collapses prompted fears among some depositors about the health of small and midsize banks. The 25 biggest U.S. banks gained $120 billion in deposits in the days after SVB collapsed, according to Fed data. All the U.S. banks below that level lost $108 billion over the same period. It was the largest weekly decline in smaller banks’ deposits in dollar terms on record.

The deposit swings could have repercussions for communities served by smaller banks if lending declines as a result. Banks also might have to start paying higher interest rates to depositors and may be inclined to stockpile cash in case of future runs, which could lead to a credit crunch in many places.

Some economists have said the U.S. economy could take a hit or enter a recession this year, triggered by reduced lending from smaller banks.

Treasury Secretary Janet Yellen said Tuesday that the U.S. economy remained robust after the banking turmoil.

“I’ve not really seen evidence at this stage suggesting a contraction in credit, although that is a possibility. I believe our banking system remains strong and resilient,” she said. “So I’m not anticipating a downturn in the economy, although, of course that remains a risk.”

The Fed last month raised interest rates by a quarter percentage point to curb inflation by slowing the economy. Chair Jay Powell said he would be watching for signs of any lending pull back that slows the economy, which could mean the Fed wouldn’t have to raise rates as much.

“The question is how significant this credit tightening will be,” he said, adding that the effect could be “quite real.”

The IMF said Tuesday that high inflation and rising interest rates will continue to pose a risk to the global economy. After years of ultracheap borrowing, many financial institutions could also struggle to adapt to elevated interest rates, the product of the highest inflation in decades, the IMF said.

The IMF said high inflation and rising interest rates will continue to pose a risk to the global economy.PHOTO: YURI GRIPAS/REUTERS

“The fundamental question confronting market participants and policymakers is whether these recent events are a harbinger of more systemic stress that will test the resilience of the global financial system,” the IMF said.

Further financial stress and credit tightening could have broad consequences for economies large and small, as well as for central banks tasked with bringing down high inflation, the IMF said. Central banks may face trade-offs between fighting inflation and protecting financial stability, and the IMF encouraged policy makers to clearly communicate their commitment to bring down inflation.

A growing source of risk is in the commercial real-estate sector, where companies are facing lower property valuations and struggling to find tenants after the pandemic shifted more work away from office buildings, the IMF said. That raises the possibility of more defaults, which could in turn pose problems for the banks that lent money for commercial real estate.

“The confluence of higher interest rates and structurally lower demand for CRE raises the risk of a broader correction to commercial real estate valuation,” the IMF said.

The IMF also said the Fed’s move to shrink its holdings of Treasury bonds, as well as the political impasse over raising the debt limit, could pose challenges to a Treasury market that is already struggling with bouts of illiquidity and volatility.

The IMF said in its World Economic Outlook report that the U.S. and European economies see their growth supported by resilient consumer demand and strong job markets. Emerging markets are expanding faster than rich countries, and supply-chain crunches seen during the pandemic and following Russia’s invasion of Ukraine are unwinding.

But its longer-term outlook remains dim. The global economy remains weighed down by the effects of the war in Ukraine and the growing rivalry between the U.S. and China. The IMF has cautioned against economic fragmentation, or the breakup of the world trading system into rival blocs comprising either the U.S. and its allies or China, Russia and their allies.

Ms. Yellen said Tuesday that she thought the global economy has proven resilient amid the headwinds.

“I wouldn’t overdo the negativism about the global economy. I think countries have proven resilient,” she said. “So I think we should be more positive. Of course there are risks.”

Looking five years ahead, the IMF forecasts global economic growth of 3% in 2028, the lowest such forecast in decades.