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- The banking fiasco may hit lending, commercial real estate, and the economy, Jeremy Siegel said.
- The Wharton professor expects stronger growth this year than the Federal Reserve does.
- Siegel flagged several headwinds that make him cautious about the current economic outlook.
The recent turmoil in the US banking sector threatens to constrain lending, weigh on commercial real estate, and drag down the wider economy, Jeremy Siegel has warned.
Silicon Valley Bank’s sudden collapse in March has stoked concerns of a credit crunch, as customers move their deposits to bigger banks for safety, and lenders pull back in fear of further bank runs. People are already being pinched by higher interest rates, and if credit dries up too, that could weigh on spending and investing, raising the risk of a recession.
“Deposit outflow pressures will undoubtedly lead to a tightening of lending standards and is a big negative going forward for the economy,” Siegel, a retired Wharton finance professor, said in his WisdomTree commentary on Monday.
Regional banks have been hit especially hard by the deposit flight. They’re key lenders to the commercial real estate sector, meaning investors in office buildings, shopping malls, restaurants could soon face a double-whammy of stricter lending and pricier loans. That could curb demand and weigh on asset prices across a big swath of the economy.
“We haven’t seen any significant losses or markdowns from commercial real estate but expected softness is likely to further lead to slowness in the second half of the year,” Siegel said, adding it could be a month or two before the full impact of SVB’s failure shows up in economic data.
The author of “Stocks for the Long Run” called for banks to raise their deposit rates, as that could deter customers from shifting their money into Treasuries and money-market funds offering higher yields.
Elsewhere, Siegel cast doubt on the Federal Reserve’s latest GDP forecast for 2023, given experts are predicting second-quarter growth of around 1%.
“The Fed estimate of just 0.4% for the whole year is totally ridiculous unless the Fed plans on engineering a severe recession in the last two quarters of the year,” he said.
Siegel added that he’s cautious about the US economic outlook for now. He pointed to the uncertain fallout from the banking fiasco, the shrinking US money supply, and house prices falling for a seventh consecutive month in January.
The commentator also expressed his hope that the Fed will realize the inflation threat is waning, and recognize how much it has tightened its monetary policy already. He warned in February that the central bank was flirting with an unnecessary recession by raising rates aggressively, and if it didn’t loosen its grip on the economy, house prices could plunge up to 15% from their peak.