Risks from policy responses to mounting global geopolitical tensions, supply chain shocks and rising inflation are set to thwart global 2022 macroeconomic growth, according to a DBRS Morningstar consensus update of rated sovereign debt calculated as a median of external contributor forecasts.
“Geopolitical tensions resulting from Russia's invasion of Ukraine do not appear likely to ease any time soon,” wrote Thomas Torgerson, co-head of sovereign ratings for DBRS. “With the prospect of a prolonged conflict, energy and food supplies remain vulnerable and prices are likely to remain elevated.”
Compared to the rating agency’s March forecast, the DBRS Baseline Macroeconomic Scenarios for Rated Sovereigns: June 2022 Update shows growth outlooks have deteriorated across most DBRS Morningstar-rated sovereigns. That’s due to problems in the global energy supply, high inflation and unpredictable geopolitical risks.
The updated GDP growth projection for the United States in 2022 is 2.6%, down 1% from March, and 1.9% in 2023, down 0.4%, while the new GDP forecast for Canada in 2022 is 3.8%, down 0.1%, and 2.4% in 2023, down 0.7%.
Notable risks
“Key near-term risks include a cutoff of energy supplies to Europe, the impact of rising interest rates on property and asset prices in North America, and an increase in geopolitical tensions in the Middle East or Asia,” analysts wrote.
U.S. growth forecasts deteriorated due to the negative contribution of net exports in Q1, and the expected impact of high inflation and higher interest rates. Growth projections for most of the U.S. commodity exporters, such as Canada and Brazil, however, are roughly unchanged, yet high commodity prices likely will persist. Analysts find the unpredictable timeline to end the war in Ukraine “could further dampen growth prospects in 2023.”
High inflation may ease, but slowly, according to DBRS, even if interest rate hikes are successful in slowing demand growth.
The U.S. ISM manufacturing survey shows delivery times from suppliers are up, low customer inventories and significantly higher lead times for commitments on capital expenditures and production materials, which are not pandemic-related, suggest pandemic-era supply challenges persist.
Although DBRS does not expect a sharp escalation of tensions in Asia, concerns remain over the U.S.-China relationship, Russia's actions in Ukraine, the potential Western failure to defuse the war, and “other regional conflicts in the Middle East or Asia.”
Unemployment mores
DBRS lowered its unemployment forecasts for North America and Europe to reflect near-record low interest rates, strong job growth and rising wages in many DBRS rated sovereigns, which are contributing to inflation, particularly in North America.
“With a few major advanced countries already close to neutral policy rates, we expect the tightening cycle will have an impact on demand growth in the next 6-12 months,” analysts wrote, likely easing inflationary pressures that can increase “the risk of a technical recession” when increasing borrowing costs force companies to lay off staff.
Even if unemployment begins to rise, “global conditions are likely to slow the process of disinflation” heightening the risk of rate tightening policy errors from central banks even as demand slows, analysts note. “At present, this risk is greatest in North America and the UK.”
Rating implications
Upcoming risks that could lead to a deeper recession include “additional geopolitical shocks,” a pandemic resurgence or a deep downturn in asset prices that could further affect ratings.
Analysts see “little reason,” however, to expect the coming global slowdown to turn into a severe recession, as soft landing or mild recession scenario ratings “are not likely to be substantially different in terms of credit impact.”
DBRS also is monitoring the potential impact of interest rate shocks on the property sector, especially real estate asset price effects in countries with high housing prices and construction rates such as the U.S. and Canada. “While equity markets have declined, real estate prices still are rising in most of the major economies,” the analysts wrote, leaving household balance sheets still in relatively strong condition despite slower housing price appreciation.
