The ‘Godot’ recession could be pushed back further, SVB crisis could force US Fed to pause rate hikes

• Robust economic performance around the world despite rate hikes could delay the ‘Godot’ recession once again.
• Adding to the recession delays, the Silicon Valley Bank (SVB) crisis could further force the US Fed to ramp down rate hikes for now.
• Analysts at Goldman Sachs now not only expect the US Fed to not hike rates in March, but also to provide ‘significant liquidity’ to banks in crisis.

The Silicon Valley Bank (SVB) crisis coupled with robust economic performance around the world despite rate hikes could delay the ‘Godot’ recession once again. A broad-based rebound in purchasing manager’s index (PMI) in the US, Europe and Asia – driven by growth in services – has resulted in a relatively optimistic economic outlook, according to a report by ICICI Bank.

Adding to the recession delays, the collapse of the Silicon Valley Bank (SVB) last week could further force the US Federal Reserve to ramp down rate hikes for now, according to a note by global brokerage Goldman Sachs.

“In light of recent stress in the banking system, we no longer expect the Federal Open Market Committee (FOMC) to deliver a rate hike at its March 22 meeting with considerable uncertainty about the path beyond March,” said a note by Goldman Sachs. The brokerage had previously expected a 25 basis point rate hike on March 22 when the US Fed’s FOMC, which takes decisions on interest rates and sets US’ monetary policy direction, is scheduled to meet.

California-based Silicon Valley Bank found itself in deep trouble when its stock plunged 60% on March 9 after SVB failed to raise funds, and by the next day, it was shut down and taken over by US regulators. After frantic meetings over the weekend, the authorities assured depositors that they would be allowed access to their funds.

‘Godot’ recession

‘Godot’ recession, as Credit Suisse’ chief economist Ray Farris puts it, has remained elusive. It has been expected for several months now, but it is yet to arrive. A ‘Godot’ recession refers to a recession that is expected but never arrives. It is named after Samuel Beckett’s play “Waiting for Godot”, where two characters wait for a person named Godot, who never arrives.

Central banks use rate hikes as a tool to control inflation, which could sometimes plunge economies into a recession. The aggressive US-led rate hikes over the past year had sparked concerns of recession. But it never arrived.

“Global PMI surveys have gone back into expansionary territory working to reduce concerns about a global recession,” said a report by ICICI Bank.

In fact, according to the International Monetary Fund’s latest outlook, the world’s economic growth is expected to slow down to 2.9% in 2023 from 3.4% in 2022.

Most major economies are expected to report economic growth in the range of 0.1% to 6.1% in 2023, according to the IMF. The only exception is the United Kingdom, which is expected to report a contraction of 0.6% this year.

“It’s the ‘Godot’ recession. By the middle of the year, people will still be expecting a recession in six months’ time,” said Credit Suisse’s Farris.

IMF’s projections peg the world’s economic growth to gain momentum in 2024, edging up to 3.1%.

SVB crisis could spoil Powell’s rate hike plans

US Fed chair Jerome Powell’s testimony to the US Congress, as recently as early last week, hinted at not just continuing rate hikes, but even speeding them up if data merited it. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” Powell said.

Powell had every reason to announce another rate hike in March to cool down the US economy and tame inflation – hiring remained strong at 3.11 lakh jobs in February, beating analyst expectations of 2.08 lakh additions.

However, the SVB crisis could force Powell’s hand. “We expect US regulators' actions to provide significant liquidity to banks facing deposit outflows and to boost depositor confidence,” the Goldman Sachs note added.

‘Lifetime opportunity for Indian investors’

How will the SVB crisis affect India? ICICI Bank notes that the Indian economy has remained resilient despite the Reserve Bank of India’s 250 basis point rate hike so far.

“High-frequency indicators like core output and PMI surveys remain robust indicating that underlying demand continues to remain fairly strong,” said the ICICI Bank report.

According to Gaurav Dua, head of capital market strategy at Sharekhan by BNP Paribas, the SVB crisis is not like the 2008 financial crisis. He notes that while it could have a limited impact as far as the Indian market is concerned, it could still cause a panic amongst investors.

“This again can be a lifetime opportunity for investors, if not in the magnitude of Covid-19 crisis or the 2008 meltdown. Use the market weakness and volatility, if any, to buy quality stocks for investment,” said Dua.

The Indian markets did panic – both the benchmark indices Sensex and Nifty50 fell 1.5% on Monday in reaction to the collapse of SVB last week, and the news of the shuttering of another bank, New York-based regional-size lender Signature Bank, on Sunday.

Whether the collapse of SVB snowballs into a contagion or not will determine the direction of markets going forward. For now, analysts recommend investors to buckle up and remain cautious.

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