I am strongly opposed to Fitch Ratings decision. The unemployment rate in the United States is at historic lows and inflation has dropped significantly since last summer. Last week's GDP report also shows that the U.S. continues to grow. The American economy is the largest, most dynamic and liquid financial market in the world. Our fiscal trajectory improved with the most recent debt limit legislation, which included over $1 trillion of deficit reduction. Through a balanced approach which would support long-term investments.
The government also lacks a fiscal framework for the medium term, unlike many of its peers, and it has a complicated budgeting process. Along with tax cuts, new spending programs, and several economic shocks, these factors have all contributed to the successive increases in debt over the past decade. We expect that the deficit of general government (GG), which was 3.7% in 2012, will rise to 6.3% in 2023. This is due to cyclically lower federal revenues, increased spending and an increase in interest costs. State and local governments will also run a deficit of 0.6% this year, after a modest surplus of 0.2% in 2022. According to the Congressional Budget Office, the Fiscal Responsibility Act's cuts to discretionary non-defense spending (15%) offer only a modest improvement in the medium-term outlook. The savings will amount to USD1.5 trillion (3.9% GDP) cumulatively by 2033. Act's near-term impacts are estimated to be USD70 billion (0.3% GDP) by 2024, and USD112 milliards (0.4% GDP) by 2025. Fitch predicts a GG surplus of 6.6% GDP in 2024, and a further increase to 6.9% GDP in 2025. The higher deficits are due to a weaker GDP growth in 2024, an increased interest burden, and a wider state and local deficits of 1,2% of GDP between 2024-2025. This is consistent with the 20-year historical average. The debt-to GDP ratio has been reduced by the lower deficits and the high nominal GDP growth over the past two years. However, it remains well above its pre-pandemic level of 100.1% in 2019. Over the forecast period, it is expected that the GG debt to GDP ratio will increase. It is projected to reach 118.4% in 2025. The debt ratio is more than two-and-a half times higher than medians for 'AAA,' which are 39.3% GDP and 44.7% GDP respectively. In the coming decade, rising interest rates and a growing debt will add to the burden of interest payments. Meanwhile, an aging population, rising healthcare costs, and an increasing elderly population will result in increased spending on the elderly if fiscal policy reforms are not implemented. CBO estimates that interest costs are expected to double by 2033, reaching 3.6% of GDP. CBO estimates that mandatory expenditures on Medicare and Social Security will increase by 1.5% over the same time period. CBO estimates that under current law, the Social Security Fund will be exhausted by 2033. The Hospital Insurance Trust Fund will also be exhausted by 2035. This will pose additional challenges to the fiscal trajectory without timely corrective actions. The ratings of the United States are based on a number of structural strengths. The United States has a large, well-diversified, high-income, and advanced economy. This is supported by an active business environment. The U.S. Dollar is the preeminent currency in the world, giving the government a great deal of flexibility when it comes to financing.
Fitch Projections: Economy Slips into Recession. Tighter credit, weaker business investment and a slower consumption rate will push the U.S. into a mild depression in 4Q23 and in 1Q24. According to Fitch, the agency expects U.S. real GDP growth to slow this year and fall from 2.1% last year to just 1.2% in 2019. The agency also predicts that overall growth will be only 0.5% by 2024. The Fed increased interest rates by 25bp between March, May, and July 2023. Fitch anticipates a further rate hike of 5.5%-5.75% in September. The Fed's goal to bring inflation down to its 2% target is complicated by the resilience of the economy, and the tight labor market. Core PCE inflation - the Fed's main price index - remained stubbornly at 4.1% year on year, even though headline inflation dropped to 3%. The Federal Funds rate will not be able to be cut until March 2024. The Fed continues to reduce its holdings in mortgage-backed securities and U.S. Treasuries which further tightens financial conditions. The U.S.'s ESG Relevance Scores (RS) are '5' in Political Stability, Rights, and '5 [+]' in Rule of Law and Institutional and Regulatory Qualities and Control of Corruption. These scores reflect Fitch's proprietary Sovereign Rating Model, which gives a high weight to the World Bank Governance Indicators. Bidenomics is a great idea!