Alternative scenarios for the US economic recovery: Fitch

Fitch Ratings has come out with its report on scenarios for US.

Ratings Subject to Economic Pressures: Fitch Ratings considers possible credit rating implications under three alternative scenarios for the U.S. economy over the next five years. This report discusses the impact on various corporate finance sectors. Immediate events are currently suppressing growth below the base case forecast, while the low case reflects a continuation of negative trends.

Alternatives Move Beyond Outlooks: Fitch’s base case allows U.S. GDP to gradually expand annually with growth peaking at 3% in 2014. A downside case maintains a 1.5% change in U.S. GDP for five years. A third case overlays an oil price shock of $150 per barrel for 2013 on the base case. Scenarios are selected as possible and plausible following the recent, unprecedented levels of monetary and fiscal stimulus.

Low Growth, Negative Impact: In a persistent low-growth environment, weak consumer demand and business investment negatively impact most sectors, particularly financial institutions, insurance, U.S. municipal issuers, and select corporate issuers. Government debt continues to rise in this scenario to maintain public services, even as stimulus winds down. Debt service coverage metrics deteriorate due to weaker asset quality and low profitability in many sectors.

Oil Shock to $150: The negative economic impact from an improving scenario that incorporates a jump in the price of oil to $150 per barrel was surprisingly limited, according to Oxford Economics’ Global Economic Model. Short- and long-term interest rates accelerate faster in this scenario as inflation rises due to the price shock. Rates then fall back as demand slackens in response to the price shock. The ratings impact is fairly muted since GDP and employment converge to the base case as consumers and producers adjust to the new price levels.

Moderate Upside in Ratings: Corporate ratings anticipate some recovery from the trough period of 2008−2010 given the severity of the recent period. This is consistent with Fitch’s through-thecycle approach, which embeds a prospective view of the economy over the next two years. Additional cyclical downside is not severe for current ratings after several years of downgrades. However, structural pressures may be present.

Additional Austerity Wild Card: A significant risk to the U.S. recovery is posed by the expiration of the reduced payroll tax and the Bush tax cuts, and lower unemployment benefits. These would be accompanied by the automatic spending cuts of $1.2 trillion over nine years from Jan. 15, 2013 and, collectively, would represent a significant fiscal tightening approximating 3.5% of GDP. Simply allowing existing law provisions to result in an unstructured and contractionary tightening is unlikely but would place the fragile U.S. economic recovery at risk.

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