Santa won't call on everyone

President Joe Biden's main economic adviser, Lael Brainard, the director of the National Economic Council may have hedged her bets - "of course there are always risks" she noted - but markets, already in high spirits, preferred to focus on the more optimistic part of her statement. She told reporters last week "the width of the runway for a soft landing has gotten much bigger". She's not alone - Goldman Sachs Chief US economist David Mericle has said "the soft landing has gone from on track to largely here." And a survey by CNBC of 35 economists found that 47% expect a soft landing, 5 points higher than a similar survey in October. Investors have found their exuberance again - the Dow Jones Industrial Average has gone above 37,000, the first time ever. Soft landing - Santa came early!

But maybe not for everyone. Extinguishing inflation without throwing the economy into a recession - the wondrous 'soft landing' - would be almost miraculous. Most assessments consider that the US Federal Reserve has only managed to bring that off once in the last 60 years. In a Presidential election year the White House will be hoping for a repeat miracle.

Banks facing tough times

A new report by the US National Bureau of Economic Research (NBER), the agency that defines the start of a recession, has found that up to 385 US banks are in danger of bankruptcy if an economic downturn happens. Their problem is focused on commercial real estate loans - higher than expected interest rates and lower property valuations could see investors default on their loans, and these defaults - if they happen - could in turn trigger uninsured depositors to start a run on the banks, such as happened with Silicon Valley Bank in March this year. Higher interest rates have reduced the value of banks' assets and they don't have as much capital to repay their debts. Smaller, regional banks could be most vulnerable. US commercial real estate values have dropped by about 20% between early 2022 and late 2023, with another 5%-15% drop anticipated in 2024 according to some independent real estate firms. It's one of the repercussions of the Covid-19 pandemic - hybrid work has become normalized, demand for office space has dropped like a stone, and commercial property values are following suit. After a decade of falling US corporate bankruptcies are up by 30% year-on-year in the 12 months to September.

US is not alone

The US is not alone in seeing a wave of corporate failures. Germany, the European Union's (EU) biggest economy, saw bankruptcies up by 25% between January and September this year compared with the same period a year ago. Allianz, the German financial services company, has estimated that global insolvency rates would grow by 10% in 2024, after rising by 6% in 2023. Eurostat, the EU's statistical office, says corporate insolvencies in the first nine months of this year went up by 13% year-on-year and are now their highest in eight years. In France, Japan and the Netherlands bankruptcies in October were up more than 30% year-on-year. In England and Wales insolvencies during the first nine months of this year reached their highest since 2009. The Organization for Cooperation and Development (OECD) has said that corporate bankruptcy rates have now exceeded those seen during the Great Financial Crash of 2008-09.

There are several reasons behind this wave of bankruptcies. Interest rates have risen which has pushed up the cost of servicing debt; higher energy costs have piled on; but it's the withdrawal of government support schemes (which the International Monetary Fund or IMF estimates amounted to more than $10 trillion in 2020 and the first four months of 2021) that has really caused the damage. So-called 'zombie' companies that survived the pandemic and the global lock-downs are starting finally to expire. All that 'free' money came at a price.

No-one can tell precisely what the impact of the global wave of bankruptcies might be. It will certainly weigh on global economic growth and employment in the coming years. Healthy start-ups and small businesses may be dragged under alongside the zombies. Governments will find it more difficult to meet their fiscal obligations, with tax revenues less than might be expected. They will be tempted to borrow more, which will inevitably push up the debt servicing costs. The 'soft' landing may arrive in the US, at least; the recession however may just be delayed. 2024 is going to be a record year for elections, with more than two billion people in 50 countries headed for the ballot box. While much attention is focused on the possibility of AI deceptions, politicians are also super aware that consumers are struggling with the high costs of living - and going into an election with credit so relatively expensive will dent the chances of many incumbents.