The recent banking crisis that started with the collapse of three regional American banks (in the second week of March 2023) – and spread further when Credit Suisse was on the brink of collapse before a forced take-over by UBS Group – can be linked to the tech sector (although we emphasize that weak corporate management at the banks in combination with central banks’ ultra-low interest rate environment and the huge quantities of free money that were pumped into economies are the primary reasons for the recent banking crisis).
What is the link with the digital economy? Well, those three American banks all had a client base that was dominated by players in the tech sector (which includes the cryptocurrencies). Many of these tech companies enjoyed great corporate earnings in 2020-2021 when the COVID-19 crisis facilitated a booming digital economy on the back of social and business restrictions that many central governments imposed. Soaring earnings were then (partly) deposited at the banks (and, unfortunately, the banks used these deposits to invest in low-yielding, long-term US government bonds which became a problem when the US Federal Reserve started to aggressively raise its key interest rate as the older bonds became worthless).
However, after superb growth in 2020-2021, the year 2022 was a very challenging year for the tech startups (reflected in the steep declines of share prices of the listed tech startups and tech indices). Meanwhile, amid rising interest rates and inflation, the tech players needed more money for their operations, and thus their deposits at the banks declined.
What became a big burden was that various tech-startups had hired more staff in 2021 amid rapidly growing revenue and customer demand. But now the economy is slowing in 2023, many firms are finding they have workforces too large to maintain. Therefore, Meta, Microsoft, Snapchat and Twitter, are all notable examples of tech firms that announced substantial job cuts in recent months, including 10,000 staff globally being fired by Meta.
The economic downturn occurred when industries were still wrestling with supply chain troubles and chip shortages caused by COVID-19 restrictions in manufacturing hubs, such as China, implying that some tech hardware remains difficult to get hold of today, and has also raised the price of some gadgets. This is a significant problem for the tech sector. Meanwhile, elevated inflation and increasing interest rates also undermine demand for tech products or services (this is also reflected in a decline of advertising revenue), while also raising transportation costs (amid an increase in oil prices). This made things complicated for numerous e-commerce companies that rely on delivering products to customers’ doors.
Similarly, cryptocurrencies, which saw booms in the past few years, also crashed at the end of 2022, with major coins like Bitcoin and Ether losing around 60 percent of their values. Meanwhile, Coinbase, the only major cryptocurrency company listed on the NASDAQ, saw its shares decline by 86 percent between late-2021 and late-2022.
This is the introduction of the article. The full article is available in our March 2023 report. This report (an electronic report) can be ordered by sending an email to email@example.com or a message to +62.882.9875.1125 (including WhatsApp).
Price of this report: