Fitch downgrades U.S. long-term rating to AA+ from AAA

PUBLISHED TUE, AUG 1 20235:25 PM EDTUPDATED 54 MIN AGO

> “In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,” the ratings agency said.

Fitch also highlighted the rising general government deficit, which it anticipates will rise to 6.3% of gross domestic product in 2023, from 3.7% in 2022.

“Cuts to non-defense discretionary spending (15% of total federal spending) as agreed in the Fiscal Responsibility Act offer only a modest improvement to the medium-term fiscal outlook,” Fitch said.

The agency also noted that a combination of tightening credit conditions, weakening business investment and a slowdown in consumption could lead the economy into a “mild” recession in the fourth quarter of 2023 and first quarter of next year.

The White House disagreed with Fitch’s downgrade. “It defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any major economy in the world,” press secretary Karine Jean-Pierre said.

This isn’t the first time a rating agency has downgraded the U.S. Standard & Poor’s cut the nation’s credit rating to AA+ from AAA in 2011 after Washington managed to avoid a default.

At the time, the agency highlighted political risk as part of its reasoning."

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Fitch strips US of triple A rating after borrowing stand-off

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Investors should still expect a bumpy road ahead

Market optimism about convergence in the global economy is overdone

HAPPY TALK: We should do our utmost to moderate the pull of the comforting convergence narratives.

Failure to do so would not only translate into a premature relaxation of the efforts needed to overcome remaining short-term challenges.
It would also leave us in an even worse position to handle the secular and structural problems that face our generation and those of our children and grandchildren.

The writer is president of Queens’ College, Cambridge, and an adviser to Allianz and Gramercy

"The first half of 2023 witnessed striking economic and financial dispersion, both within countries and across them. With some of this dispersion reversed in July, there is a growing tendency to forecast convergence in the period ahead, and the favorable set of outcomes that would come with that, from better growth and inflation results to rewarding investment performance. Yet, doing so now would be premature and unwise...

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This growing talk of less economic and financial dispersion naturally fuels economic and market optimism. Indeed, the longer it persists, the more it may reduce uncertainty and lessen volatility within and across countries. In turn, this would improve the prospects for soft landings at national and global levels, alleviate interest rate and currency pressures, and enable the next leg up in asset prices to be led by securities with less inflated valuations. Also, with the possibility of such a range of positive feedback loops among them, it is tempting to believe that the second half of the year will see a decisive lifting of the clouds of uncertainty that have been hanging menacingly over the global economy and markets. . .

In a world where manufacturing is under pressure and surplus savings are being depleted, fundamental support for market-wide price gains will lack the energy of the small set of stocks riding a huge secular wave (think artificial intelligence and other structure-changing innovations) or having “all-weather” characteristics (think traditional Big Tech).

IMF raises global growth prospects,

and other economics news to read this week

1. IMF raises prospects for the global economy

The International Monetary Fund (IMF) has slightly raised its global GDP growth estimates for 2023.

However, it continues to warn about persistent challenges over the medium term.

The IMF's latest World Economic Outlook points to reduced inflation as a factor in the improved outlook for 2023, but has kept its 2024 forecast unchanged – both now stand at 3% growth. That's a 0.2 percentage point rise on its April forecast for this year.

The global economic outlook — The IMF has raised its economic forecasts slightly for 2023.

"We're on track, but we're not out of the woods," IMF Chief Economist Pierre-Olivier Gourinchas told Reuters, adding that the upgraded outlook is driven largely by first-quarter results.

"What we are seeing when we look five years out is actually close to 3.0%, maybe a little bit above 3.0%.
This is a significant slowdown compared to what we had pre-COVID."

The IMF forecasts that global headline inflation will drop to 6.8% this year, down from 8.7% last year.

And it predicts a further fall to 5.2% next year.
However, core inflation is likely to drop more slowly, with Gourinchas warning that it may not be until 2024 or early 2025 that inflation is back in line with national targets.

2. US Fed and European Central Bank raise rates

The US Federal Reserve and the European Central Bank (ECB) have both raised interest rates this week as they continue to try and tame inflation.

The Fed raised rates by a quarter of a percent – the 11th increase in its last 12 meetings. It means the benchmark overnight interest rate moves to the 5.25-5.50% range, a level last seen in 2007.

Fed Chair Jerome Powell said after the announcement that the bank's staff are no longer forecasting a US recession.

Meanwhile, the ECB raised rates for a ninth consecutive time this week. The ECB's deposit rate is now at 3.75% following the 25-basis-point increase.

This is its highest level since 2000 – before the euro currency was even in circulation. The main refinancing rate is now at 4.25%.

However, there are signs of a potential pause in rate rises in September. "There is the possibility of a hike. There is the possibility of a pause. It's a decisive maybe," said ECB President Christine Lagarde.

US GDP grew at a 2.4% annualized rate in the second quarter, while inflation slowed. The increase in GDP was quicker than economists polled by Reuters had expected.

Major European banks have flagged the increased risk of bad loans as the global economy copes with slow growth and high inflation.

4. More on finance and the economy on Agenda

The first edition of the World Economic Forum's Global Risk Officers Outlook has identified the biggest risks to organizations worldwide. Macroeconomic indicators in a global economy struggling with sluggish growth are high on the list of talking points.

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