Bank economists expect credit conditions to weaken over next six months

The American Bankers Association released its latest Credit Conditions Index which shows that bank economists expect credit conditions to weaken in the next six months.

The Index examines various indices produced by the Economic Advisory Committee (EAC), which consists of chief economists from major North American banks. The report finds a slightly less pessimistic outlook for business and consumer credit in the first quarter of 2023 compared to last year’s fourth quarter, but the overall expectation is for credit conditions to deteriorate in the next six months.

The EAC has downgraded its forecast for real economic growth this year from 0.6% to no growth, but believes a slowdown could drive inflation closer to the Federal Reserve’s target of 2%, potentially leading to lower interest rates later this year.

The Headline Credit Index improved slightly in Q1 to 12.5, with a sub-50 reading indicating bank economists expect credit market conditions to worsen over the next six months.

The Consumer Credit Index improved 3.6 points to 13.6 and the Business Credit Index improved 1.4 points to 11.4, with a majority of EAC members expecting both to deteriorate over the next two quarters. Despite the expectations of weaker credit conditions, consumer financial stress remains muted and many companies continue to hire. Bank economists are divided on whether a recession will occur this year, highlighting the uncertainty in the current economic climate.