North American credit faces deteriorating 2024 outlook: Fitch

January 08, 2024 (MLN): Sharply slowing economic growth, higher unemployment and continued tight financing conditions are key factors underpinning Fitch Ratings’ ‘deteriorating’ 2024 sector outlooks for the majority of North American credit, including sovereigns, U.S. banks, leveraged finance, retailing, REITs, most non-bank financial institutions and most structured finance asset classes.

U.S. growth was better than expected in 2023 at 2.4%, but we forecast it to drop to 1.2% in 2024, with only a shallow recovery in 2025. Core inflation, while easing, remains above central banks’ 2% targets.

Key risks include higher-for-longer interest rates beyond our base case and financial market volatility should monetary policy and growth meaningfully vary from current expectations.

Tight funding conditions, decelerating economic growth and sector-specific pressures on key asset classes, such as real estate and structured finance, indicate risk bias to the downside.

Across multiple sectors, profits are declining and demand is expected to decelerate further as the economy slows in response to the lagged effect of higher interest rates and tightening credit conditions. 

Rising unemployment and higher cost of living pressures are key headwinds for consumer-based industries and asset classes, also pressuring U.S. banks’ asset quality and operating profits.

Some sector outlooks have improved to ‘neutral’ from ‘deteriorating’ year-over-year, including public finance and insurance.

Inflationary pressures have eased for U.S. public finance as firms have incorporated higher operating costs into budgets, including water and sewer utilities, while higher across-the-board costs for public power could translate to rate increases.

Title insurance’s shift to neutral was due to the benign claims environment, strong capital levels and a leaner expense structure, while U.S. mortgage insurers continued to record strong profitability despite a slowing economy.

Canadian banks have a neutral outlook, as they have largely acclimated to the higher rate environment, while the U.S. life insurance sector outlook moved to improve, as insurers will continue to benefit from higher rates and balance sheet strength.

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