A banking crisis or just a short squeeze?

Te Whanganui-a-Tara - The banking crisis sparks recession fears and the World Bank is warning of a lost decade of global growth.

But Goldman Sachs says generative AI could create a productivity boom and lift global GDP by seven percent.

Recession risks have been re-ignited by the recent banking collapses and rescue deals and there are now concerns that global growth will weaken as the crisis heralds the end of the easy cash era and the arrival of a credit crunch, the World Economic Forum says.

There is a sizeable risk that the ongoing banking trouble triggers a sudden stop in lending, which would then send the economy into the sort of recession which would go beyond what is strictly needed to tame inflation.

New Zealand’s Reserve Bank expects the official cash rate to peak at 5.5 percent this year. That would mark the most aggressive policy tightening streak since the official cash rate was introduced in 1999.

Reports are coming in that small and big US banks are borrowing heavily and holding onto cash. Central bankers are closely monitoring the potential for a credit crunch, with one European central bank official flagging a possible tightening in lending.

Global bank stocks are down nearly 15 percent this month. And companies in sectors sensitive to the growth outlook – such as real estate and oil and gas – are now slipping on stock markets.

 The World Bank says. It estimates that average potential worldwide economic growth will slump to a three-decade low of 2.2 percent per year through to 2030 without big policy changes.

Failure to reverse this expected slowdown would have profound implications for the world’s ability to tackle climate change and reduce poverty, the bank says.

Nearly all the economic forces that powered progress and prosperity over the last three decades are fading, it says.

But it adds that a concerted effort to boost investment in sustainable sectors, cut trade costs, leverage growth in services and expand workforce participation could boost potential GDP growth by up to 0.7 percentage points to 2.9 percent, according to the report.

The World Bank is also watching developments in the banking sector, which come as rising interest rates and tightening financial conditions drive up the cost of borrowing for developing countries.

The slowdown could be much sharper, if another global financial crisis erupts, especially if that crisis is accompanied by a global recession.

Generative AI such as ChatGPT could lead to a productivity boom that would lift global GDP by 7 percent within 10 years, according to a Goldman Sachs report. However, artificial intelligence could also create significant disruption in the labour market, putting 300 million jobs at risk worldwide.

Portugal is rolling out a $2.7 billion plan to help low-income families cope with soaring inflation and high interest rates. It is also scrapping value-added tax of 6 percent on 44 essential food products but is facing criticism that this measure is not enough to help consumers.

Canada's budget also contains a "grocery rebate" for 11 million low-income households. The budget also looks to help Canada compete with the United States in the low-carbon economy, including through a series of green investment tax credits worth C$35 billion ($26 billion).

A total of 22 developing countries were bailed out by China between 2008 and 2021, according to a report by researchers from the World Bank.