With the U.S. economy showing signs of slowing, geopolitical risk is intensifying, says Fitch Ratings in a new report.
The effects of tighter monetary policy are increasingly evident on the U.S. labour market, as well as on demand, the rating agency said.
“Signs of a slowdown in the U.S. are evident in weak credit growth and slowing consumer spending,” it said.
As these trends continue in the second half of 2024, headline real GDP growth is expected to decelerate materially, but growth is still expected to remain well above recession territory, it noted.
“Continued disinflation and the beginning of a global monetary policy pivot have reduced the probability of a major negative credit risk scenario stemming from continued monetary tightening,” Fitch said. It noted that the Bank of Canada, the European Central Bank and the Swiss National Bank have all now started to cut rates.
“While we now expect a slightly slower pace of rate cuts in 2024 from the Federal Reserve … the latest U.S. inflation and labour market data support our view that two reductions are likely in [the second half of 2024],” the report said.
However, geopolitics represents a significant source of uncertainty to this outlook, the report said.
Already, a string of recent elections around the world has signalled large political shifts, with incumbents tending to lose ground in these contests.
“The forthcoming U.S. election in November will be particularly relevant for global credit as it could mark a pivot point for policy in several important areas,” Fitch noted.
Alongside the extensive election activity, “[t]he broader context of geo-strategic friction between major powers remains a key long-term theme,” Fitch said.
“The greatest risk to credit would come from a direct conflict in one of these hotspots. However, broader geopolitical tensions are likely to continue to feed into such diverse areas as trade and investment policies, capital flows, supply chains and [foreign direct investment],” it said.