‘Turmoil’: Expert’s grim recession call

In this edition of StreetSlang, J.D. Durkin breaks down how to tell if the U.S. economy is in a recession.

Speaking with the Financial Times this week, former US Treasury Secretary Henry “Hank” Paulson joined the growing chorus of insiders who believe a US recession is now all but inevitable.

He told reporter Edward Luce the banking panic – following the collapse of Silvergate Bank, Signature Bank and Silicon Valley Bank in the US, and the near-collapse of Credit Suisse in Europe, which was eventually taken over by UBS — was not over.

“Some things we know and some things we don’t know,” Mr Paulson told the publication.

“What we know is that if you’re running a small or regional bank right now, you wouldn’t be lending. The capital markets shut down for two or three weeks. Now they’re opening but not to the extent they were.

“So I think it’s pretty likely we will see a recession if you look at what’s happening to credit.”

However, he said he believed a US recession will “take a while to manifest itself”.

“Another thing we are almost certain to see is credit provision moving outside the regulated banking sector. This is different to the extent that the panic moves quicker when you have social media, and Twitter, and who knows where it’s going to crop up again. There will be a lot of focus on Europe, where financial institutions aren’t as strong or as well capitalised as they are here,” he continued.

“In the last couple of weeks you’ve had $300 billion in deposits move out of the banking system, maybe a trillion since the beginning of the year. These deposits have gone to money markets, and have also moved from regional to big banks. There’s a lot of turmoil. 

“There is uncertainty and more to come. It’s been a real wake-up call. Confidence has been shaken. The risks are still out there.”

Mr Paulson is far from an isolated voice when it comes to predicting a looming recession, with the International Monetary Fund (IMF) warning in its World Economic Outlook update for April this week that the dangers of a downturn had soared for advanced economies as a result of recent US and European bank failures, and dropping its forecast for global output growth by 0.1 per cent.

Australia’s growth is tipped to be 1.6 per cent this year and 1.7 per cent in 2024.

It cautioned that the world economy was “entering a perilous phase during which economic growth remains low by historical standards and financial risks have risen, yet inflation has not yet decisively turned the corner” and that a “hard landing – particularly for advanced economies – has become a much larger risk”.

It added the chances of a “hard landing” had “risen sharply”, with IMF chief economist Pierre-Olivier Gourinchas declaring that “the situation remains fragile” and that “downside risks predominate”.

“With the recent increase in financial market volatility and multiple indicators pointing in different directions, the fog around the world economic outlook has thickened,” the IMF report states.

Treasurer Jim Chalmers weighed in on the IMF’s predictions, noting Australia “won’t be completely immune” from the economic fallout to come.

And just last month, an alarming new report also weighed in on a “looming recession” headed our way within months.

According to the latest Econosights report by AMP senior economist Diana Mousina, “predictions of an approaching recession have become a consensus forecast”, although global growth has improved in early 2023, particularly in Europe and the US.

Ms Mousina noted that the gloomy outlook reflects a global period of “sharp and fast interest rate hikes” – which Australia is no stranger to after 10 consecutive rate rises.

She said “history tells us that there is a good chance that the end of central bank’s tightening cycle will result in some sort of crisis or downturn” as they desperately try and get inflation under control.