From left: CUNA economists Dawit Kebede, Ligia Vado, and Mike Schenk. (Photo by EPNAC.com)
A recession is coming in 2023, but it will be modest, relatively short, and not one that causes credit union leaders to hit the panic button, according to CUNA economists.
“We think the operating environment is going to become more challenging,” CUNA Chief Economist Mike Schenk said during a breakout session Tuesday at CUNA Governmental Affairs Conference. “Don’t run for your lives. Run for your members’ lives. As financial first responders, we run toward problems and solve them. We use our capital to get members through the tough times.”
The economic environment will impact credit unions operationally in three ways:
There will be a general return to “normal.” In 2022, credit unions experienced a 20% loan growth. Economists expect a steep decline to 7% in 2023, which is closer to historic norms. They forecast a 6% savings growth in 2023.
There will be a significant shift in risk profiles. Economists anticipate a significant deterioration in asset quality. Credit unions are beginning to see increases in delinquency and charge-off rates, but Schenk says it’s not an alarming concern. He notes that delinquency and charge-offs were at all-time lows during the pandemic, so while there will be increases, it will not be closer to what was experienced during the Great Recession. However, it will be an indication that members are financially stressed.
There will be more obvious bottom-line pressures. With modest loan growth and steady savings, liquidity concerns will remain, Schenk says. Economists also predict a 30-basis point drop in earnings.
“We think there will be a recession, but it will be modest, relatively short, and deep,” he says. “But there’s no reason to hit the panic button. Staying engaged and lending money in this environment will be important.”
CUNA Senior Economists Dawit Kebede and Ligia Vado also offered foresight into trends that are impacting consumers’ behavior and the economic environment. Key takeaways included:
Economic activity will slow down below gross domestic product (GDP) growth.
The labor market is strong but is expected to create slack and a slight increase in unemployment by the end of the year.
The Federal Reserve will keep rates high, and further rate increases are expected to push rates to 5.1% by the end of 2023. Inflation will slow, but it will likely remain above the Fed’s target 2% rate.
Strong consumer spending, pent-up demand, and excess savings are fueling economic activity.
Consumers’ household balance sheets are still in good shape and above pre-pandemic levels.
Americans’ financial health is returning to normal. In 2022, 70% of Americans were financially unhealthy. This is an increase over the 66% in 2021 but has returned to near pre-pandemic levels of 72% in 2018. The effects of inflation, ending pandemic government support, and the decreasing value of assets have contributed to the increase.
The Winter 2023 issue of Credit Union Magazine explores award-winning marketing, board training on a budget, developments in instant payments, service to small businesses, and NCUA’s final rule on member expulsion.
