Slowing Economy Drives North American Sector Deterioration

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, US banks, leveraged finance, retailing, real estate investment trusts, most non-bank financial institutions, and most structured finance asset classes, according to a recent statement from the rating agency.

Findings from a new Fitch report, titled North America Cross-Sector Outlook 2024, conclude that while US growth was better than expected in 2023 at 2.4 percent, it forecasts a drop to 1.2 percent in 2024, with only a shallow recovery in 2025. Core inflation, while easing, remains above central banks' 2 percent targets.

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 US banks' asset quality and operating profits, Fitch said.

Some sector outlooks, including public finance and insurance, have improved to "neutral" from "deteriorating" year-over-year, Fitch continued.

Inflationary pressures have eased for US 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 US 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 US life insurance sector outlook moved to improving, as insurers will continue to benefit from higher rates and balance sheet strength, Fitch said.