Fitch Warns of Deteriorating 2024 Prospects for North American Credit

In a recent analysis, Fitch Ratings has highlighted a concerning outlook for the North American credit landscape in 2024, citing factors such as sluggish economic growth, increased unemployment, and persistent tight financing conditions. The pessimistic outlook extends across various sectors, encompassing sovereigns, U.S. banks, leveraged finance, retailing, REITs, and most non-bank financial institutions.

While the U.S. experienced better-than-expected growth of 2.4% in 2023, Fitch forecasts a significant drop to 1.2% in 2024, with a modest recovery anticipated in 2025. Core inflation, although showing signs of easing, remains above central banks' 2% targets.

Crucial risks identified include the possibility of higher-than-anticipated interest rates deviating from the base case and potential financial market volatility if monetary policy and growth significantly deviate from current expectations.

The combination of tight funding conditions, a decelerating economy, and sector-specific challenges in key asset classes, such as real estate and structured finance, suggests a prevailing risk bias toward the downside.

Profits across various sectors are on a downward trajectory, with demand expected to further decelerate as the economy responds to the delayed impact of elevated interest rates and constrained credit conditions.

Rising unemployment and increased cost of living pose substantial challenges for consumer-based industries and asset classes, putting additional pressure on U.S. banks' asset quality and operating profits.

Notably, certain sector outlooks have seen a positive shift from 'deteriorating' to 'neutral' on a year-over-year basis. This includes public finance and insurance sectors.

Inflationary pressures have alleviated for U.S. public finance, as companies have factored in higher operating costs, including water and sewer utilities. Meanwhile, higher overall costs for public power may translate into rate increases.

The title insurance sector has shifted to a neutral outlook, attributed to a benign claims environment, robust capital levels, and a streamlined expense structure. U.S. mortgage insurers have maintained strong profitability despite the economic slowdown.

Canadian banks maintain a neutral outlook, having adapted well to the elevated rate environment. Conversely, the U.S. life insurance sector outlook has improved, driven by the continued benefits from higher rates and a robust balance sheet.