The Financial Brand Insights - Forum 2022 Digital

Economic Trends Hasten Transition to Digitization

As we consider the future of digital technology in the financial sector, it is important to take stock of the economic conditions that will play a role in accelerat- ing or slowing the inexorable trend toward digitization. In this article we will look at both the secular and cyclical economic trends that will have an impact. QUICK DEFINITIONS: Cyclical has to do with the shorter-term business cycle. Secular are longer-term structural changes in the economy.

shows, anytime the yield spread line goes below zero, this indicates inversion and periods of reces- sion follow. The yield curve has been inverted since July 9, 2022. The real questions are: When will a recession begin? How long will it last? How deep it will be? The recession will likely begin in either the fourth quarter of this year or the first quarter of 2023. Because we are heading into this downturn with a very strong labor market and financial sector, the recession should be shorter in duration and shal- lower than the previous two. For example, unemployment normally peaks around 7% to 10% in most recessions. This time it will likely top out at less than 6.5%. In this really tight labor market, employers will be reluctant to lay off workers as a result of the difficulty they’ve experienced in recruiting and retaining them in the first place. Thus, financial conditions should hold up well and not exacerbate the slowdown, as they often do in down cycles. Additionally, the Federal Reserve could begin lowering rates in late 2023 to grapple with the recession. Once we come out of the recession, labor mar- kets will return to the tight conditions we see today within a couple quarters. The implications of these cyclical forces will be to accelerate the move to digitization. The business recession playbook calls for finding efficiency and productivity improvements in lieu of hiring. Many businesses will look to deploy technologies to reduce labor costs, improve the productivity of workers and simply do more with less. With the likelihood of tight labor markets after the recession, businesses will have double incentives to turn to technology. The Impact of Secular Forces on Bank Digitization In looking at the longer-term trends of the economy, there are several secular forces that will have a dramatic impact on digitization. Aging Demographics. There is little doubt that the U.S., like much of Europe, Japan, China and Russia, is struggling with the economic and social consequences of aging societies. Simply put, Baby Boomers are retiring faster than their grandchildren are entering the workforce. As the chart on the next page illustrates (Figure 2), the percentage of our population in the workforce has been steadily declining for two decades.

Cyclical Forces Impacting Bank Digitization

Most indicators point to a recession on the horizon. Inflation is outpacing wages (a concept economists refer to as negative real wages), and this has already impacted consumption. Simply put, the money we make does not buy as much as it did a year ago, and that’s important because two-thirds of the economy is consumer spending. Add the necessary tightening of monetary policy to deal with inflation and we have the recipe for a recession within the next few quarters. Perhaps the best indicator of future recession probability is the yield curve (the spread between the yield on one-year treasuries and ten-year trea- suries). Any time the yield curve is inverted (one-year yields are higher than ten-year yields), a recession follows within 12 to 18 months. The chart below shows this pattern. (Figure 1) We have not had a recession in the past 70 years that was not preceded by an inversion of the one- and ten-year yields, nor has there been an inversion that was not followed by a recession. As the chart

By Blake Hastings SVP of Corporate Strategy and Chief Economist at SWBC , parent company of SWIVEL

Inverted yield curve as a predictor of U.S. recessions Figure 1

2% 3% 4% 10Y-1Y spread on treasury yield U.S. recession

-4% -3% -2% -1% 0% 1%

-.32%

An inverted yield curve has predicted the past 7 recessions

1970

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THE FINANCIAL BRAND INSIGHTS FORUM 2022