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From cost of living crisis to credit squeeze

The strongest headwind for the global economy has shifted from an energy crisis and the related squeeze on real incomes to a potential banking crisis and associated drag on credit. Since banks are relatively well-capitalised we do not anticipate a full-blown banking crisis, but we do expect a tightening of credit conditions to weigh on economic activity across the board. We still expect recessions in all major advanced economies later this year, but the shifting headwinds have meant that we no longer expect the US to be more resilient than Europe. With central banks still mindful of inflation risks, interest rates will stay at their peaks for the best part of a year in most cases. But when they come, cuts will be more aggressive than is typically assumed. Meanwhile, China’s reopening boost is now largely over and weak balance sheets and limited policy support will mean that the recovery is more likely to disappoint than surprise from now on.