CUNA: War in Ukraine to Increase Economic Stresses
Chief economist says higher prices for energy and raw materials are the most likely early economic effects.
CUNA Chief Economist Mike Schenk told GAC attendees Tuesday that the smooth road of continuing growth it has forecast for the next two years now has a huge asterisk due to Russia’s assault on Ukraine.
Schenk said the range of possibilities is immense, from the war ending within a few days to the violence ratcheting up to unimaginable heights.
At the least, the war will lengthen the time before current supply chain bottlenecks and related price increases are resolved.
“If this continues, it’s likely those forecasts for inflation will more than likely go up a little bit,” he said.
Without considering Russia’s invasion of Ukraine, CUNA had forecast inflation would fall from its current 7.5% annual rate to 3.5% by the end of this year, and fall to 2.5% by the end of 2023.
As a ballpark estimate, he said he would expect to add a percentage point to the inflation forecast for this year, and add a quarter to a half a percentage point to 2023’s inflation forecast.
Schenk said the pandemic, Putin and prices are “the three wild cards in this forecast.”
“We’re good about forecasting the economy in the context of what normally happens, but what’s happening today and has been happening the last two years has not been normal,” Schenk said.
“We’re not public health experts. So we weren’t really great in forecasting the trajectory of the pandemic, and we weren’t very good in forecasting how consumers were thinking about the pandemic and reacting to the pandemic,” he said.
The biggest miss was that CUNA forecast a much more dire impact on 2020 earnings and loan quality than what occurred. Schenk said earnings took a big early hit, primarily because credit union managers took big provisions for an anticipated big wave of loan losses. Those loan losses never materialized, in large part because of the massive level of federal support to households — also outside CUNA’s forecast.
And the unwinding of those provisions contributed to record earnings in 2021, Schenk said.
The pandemic also led to a shift in consumer spending from services to goods, including cars and trucks, which in turn contributed to supply chain issues and related price increases.
Now the uncertainties are around what Putin will do in Ukraine.
“Now, I have no idea what’s happening with Russia,” he said. “The non-zero probabilities are very wide. They range from maybe we wake up tomorrow morning and the world is a better place and they’ve made up and we don’t have to worry so much about the disruption there, or something much, much worse.”
What is known is that the primary immediate impacts will be around significantly higher prices for energy, metals and other raw materials. There could be some consumer confidence implications as well.
CUNA economists also discussed other parts of their latest forecast, drafted in January and largely unchanged from November.
CUNA said it expects ROA for 2021 to come in at 1.10%, and fall to 0.70% this year and 0.80% next year. Callahan & Associates estimated in its Feb. 16 Trendwatch webinar that ROA came in at 1.06% for the full year of 2021.
Savings balances spiked 20% and loan growth slowed to 5.3% in 2020. Last year, savings growth slowed to 12%, while loan balances grew 7%.
For this year and in 2023, CUNA forecast 5% annual savings growth and 9% annual loan growth.
CUNA said it expects loan balance growth across the major categories:
- Credit cards, which grew 1.8% in 2021, will grow 6% this year.
- Unsecured loans, which fell 1% in 2021, will grow 6% this year.
- New vehicles, which fell 1.1% in 2021, will grow 4.5% this year.
- Used cars, which rose 9% in 2021, will grow 8% this year.
- First mortgages, which grew 9.4% in 2021, will grow 5.4% this year.
- HELOCs and second mortgages, which fell 2% in 2021, will grow 10% this year.
- Commercial loans, which grew 15% in 2021, will grow another 15% this year.