Fitch Ratings reaffirmed United States credit rating as ‘AA+,’ and gave it a stable outlook. They cited the strength of the US economic structure and the unprecedented financing flexibility that the US dollar provides due to its status as world’s largest reserve currency.
The rating agency also expressed growing concern over high fiscal deficits in the country, rising debt, and increasing political divisions. All of these factors pose a threat to the long-term stability of the economy.
The debt and deficit burden is rising
Fitch is concerned about the fiscal health of the United States, especially the high deficits in the country’s budget and the substantial debt level.
The general government deficit (GG) will increase to 8.8% in 2023 from its previous 4.1%.
The main reasons for this widening of the gap were declining revenues, higher interest payments and worsening finances at state and local governments.
Ratings agency stated that “the government has not been able to effectively tackle the large fiscal deficits and debt load, as well as looming spending increases associated with an ageing population.”
Fitch predicts that the GG gap will narrow to 8,1% of GDP by 2024. However, the debt burden and interest rates are likely to increase due to the higher levels of debt.
Fitch estimates that by 2026 the GG Debt-to-GDP Ratio could be 124.4%. This is up from 114% as of the end 2023. This ratio may reach 131% in 2028 if fiscal policies are not changed.
The challenges of political polarization
Fitch also highlighted challenges presented by an increasingly polarized US political climate.
As evidence that governance problems are affecting the US credit rating, the agency pointed out frequent confrontations about the debt ceiling as well as threats of shutdowns of the government.
The country’s economy is further complicated by these challenges and the inability to reduce the large fiscal deficits.
It is expected that the presidential and congressional election in November 2024 will play an important role in determining US fiscal and economic policies.
Fitch, however, does not expect a major change in the fiscal situation, regardless of what happens at the polls.
It is expected that both the Vice President Kamalah Harris and the former President Donald Trump will likely continue to support policies which extend the majority of 2017’s tax cuts. This would perpetuate the fiscal trajectory.
Fitch predicts that US growth in 2024 will slow down, to an annual average growth rate of 2,1%. This is down from the 2.5% growth in 2023.
This slowdown is attributed by the agency to a shrinking deficit that will reduce spending on government and therefore, lessen its contribution to economic growth.
A rising deficit in trade is also projected to have a negative impact on net exports.
Federal Reserve is anticipated to start a cycle of rate cuts in September 2024. The Fed has been maintaining interest rates at the same level since July 2023.
Fitch expects to see a reduction of 25 basis points in September. This will be followed by a further cut in December. Further cuts are likely in 2025.
As new information becomes available, this post Fitch affirms US Credit Rating at ‘AA+” amid Rising Debt and Political Polarization could be updated.
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