Crypto News: Crunch, not crash

Hello. Today we look at perspectives on the coming credit crunch, the UK joining the Indo-Pacific free-trade bloc and why aging is behind the drop in US labor-force participation rate.

How bad will the looming credit crunch be? That's the$64,000 question overhanging the US economy right now.

As economists pencil in a broad range of potential outcomes — detailed here by Enda Curran — JPMorgan Chase & Co.'s team offers some historical insight:

"While recessions always generate credit tightening, the reverse is far less clear."

An "extreme shock" from credit can indeed tip the economy into a downturn, JPMorgan's Bruce Kasman and Joseph Lupton wrote Thursday. Something like that happened in 1980, they said. "But more moderate credit shocks do not end expansions."

It will take time to gauge the impact of the recent banking collapses and subsequent outflow of deposits from US lenders. Last Friday's weekly update from the Federal Reserve showed that lending balancesactually climbed — by $63 billion — in the week after Silicon Valley Bank's demise.

Notably, Neel Kashkari — who led Washington's financial-rescue program as it took shape during the 2008 crisis and is now Minneapolis Fed president — said Thursday it's too soon to be definitive on what will happen.

"What's unclear right now is how much of the banking stresses of the past few weeks is leading to a sustained credit crunch which would then slow down the US economy," Kashkari said.

For their part, JPMorgan economists see a sharp slowdown in bank-lending growth to 2% this year from 12% in 2022. While the blow to the economy will be blunted by relatively solid corporate finances, they tally a 0.8% subtraction from GDP.

Individual anecdotes abound, as Katia Dmitrieva and Michael Sasso report here. Greg Schneider, a commercial loan analyst, is picking up on regional banks charging higher rates for riskier clients, a concept he says rarely came up a year ago.

"Banks will be more selective about who they lend to," said Schneider, who works at Coalition Greenwich, a provider of financial data and analysis.

Mike Brey, who runs toy retailer Hobby Works in Maryland, is among those reporting an altered environment. He's been trying to get his $250,000 working capital line at his regional bank renewed for more than a month now — a much longer delay than previous years.

"As I go through these crises, this is how they always start," he said. "They say 'it's fine. It's contained. It's just this one industry.' Then things just go off the rails."

The latest weekly nationwide lending data will be out at Friday afternoon.

Meantime, life just keeps on getting harder for America's smaller banks as savers look elsewhere for better returns, as today's Big Take explains.

—Chris Anstey

Got tips or feedback? Email us at ecodaily@bloomberg.net

The UK will join an 11-nation Indo-Pacific free-trade bloc, becoming the first new member since its creation, in a bid to strengthen economic ties with new partners following divorce from the European Union.

Prime Minister Rishi Sunak's government sees membership of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which includes Australia, Japan and Canada, as a boost for economic growth and geopolitical relations.

The UK expects growth of £1.8 billion ($2.23 billion) each year over the long-term, a figure that could rise if other countries join the bloc. Separately, UK house prices fell at the sharpest annual pace since 2009 but real incomes posted their first increase since 2021.

Core issues | Underlying inflation in the euro area hit a record in March, handing ammunition to European Central Bank officials who say interest-rate increases aren't over yet. Meanwhile, German unemployment rose more than expected.
More to do | Fed officials continued to stress the need to lower inflation even as they keep an eye on the fallout from the collapse of Silicon Valley Bank earlier this month.
China recovery | China's economic recovery gathered pace in March, with manufacturing continuing to expand and services activity and construction picking up strongly.
Friend or foe | US Trade Representative Katherine Tai slammed China for weaponizing trade against partner countries, the Biden administration's latest criticism of the world's biggest manufacturing power.
Japan inflation | Inflation in Tokyo slowed further in March, following a sharp deceleration in the previous month that was mainly driven by government subsidies for electricity costs. Meanwhile, Japan unveiled a raft of new proposals to incentivize people to have children.
Worried in Como | More US banking turmoil, wider economic fallout, the Fed losing its inflation focus and even a "financial crash" are among a panoply of dangers troubling economists gathering by Lake Como.

Fresh analysis by New York Fed researchers corroborates the idea previously flagged in this space that population aging helps to explain why the US labor-force participation rate hasn't regained pre-Covid levels despite the abundant signs of a hot job market.

"The aging of the baby boomers between 2020 and 2022 led to a significant rise in retirements, reducing participation," wrote Mary Amiti, Sebastian Heise, Giorgio Topa and Julia Wu in a blog post. The dynamic is "likely to continue to exert strong downward pressure on participation going forward."

All other things held equal, this could keep the demand for labor elevated relative to supply, sustaining pressures on wages and in turn inflation.

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