Goldman Raises Recession Odds to 35%

Goldman Sachs raised the chances for a recession in the U.S. Thursday to 35%, up 10 percentage points, following the collapse of Silicon Valley Bank.

The pressure on small and mid-sized U.S. banks following the swift downfall of SVB could further slow the economy, and will likely raise the probability of a recession this year, according to Goldman, JPMorgan and other Wall Street analysts.

Goldman Sachs Chief Economist Jan Hatzius also predicts that U.S. gross domestic product (GDP) will fall to 1.2% for the upcoming quarter.

J.P.Morgan said regulatory scrutiny on smaller banks and a run on deposits will hamper loan growth. With no offset from larger banks, gross domestic product (GDP) would reduce by 0.5% to 1.0%, over the next year or two.

"Ongoing pressure could cause smaller banks to become more conservative about lending in order to preserve liquidity in case they need to meet depositor withdrawals, and a tightening in lending standards could weigh on aggregate demand," said economists at Goldman Sachs led Hatzius.

Banks across the globe slumped following the closure of SVB and Signature Bank, with worries about stresses in the global banking system exacerbated by troubles at Swiss lender Credit Suisse. U.S. banks started to find footing again on Wednesday thanks to bargain hunting.

JPM notes that small banks, per the U.S. Federal Reserve's definition, account for 30% of aggregate banking system assets, and 38% of the system's loan book in the U.S.

Analysts believe the collapse of SVB and Signature Bank highlights the delayed effect of the U.S. central bank's aggressive rate hike campaign.