Fitch Ratings has downgraded the US Long-Term Foreign-Currency Issuer Default Rating (IDR) from 'AAA' to 'AA+'. The Country Ceiling remains at 'AAA', while the Rating Watch Negative has been removed, and a Stable Outlook assigned.
The rating downgrade reflects expected fiscal deterioration over the next three years, a high and growing government debt burden, and declining governance compared to 'AA' and 'AAA-rated peers over the last two decades. According to Fitch, the repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management.
Fitch forecasts a general government (GG) deficit of 6.3% of GDP in 2023, up from 3.7% in 2022, driven by weaker federal revenues, new spending initiatives, and a higher interest burden. The GG deficit is projected to reach 6.6% of GDP in 2024 and 6.9% of GDP in 2025.
The general government debt-to-GDP ratio is at 112.9% in 2023. Fitch projects the ratio to reach 118.4% by 2025, making the US fiscal position vulnerable to future economic shocks.
According to Fitch, tighter credit conditions, weakening business investment, and a consumption slowdown may lead to a mild recession in the US economy in Q4/23 and Q1/24. Fitch expects real GDP growth to slow to 1.2% this year from 2.1% in 2022, with overall growth at just 0.5% in 2024. The labor market's lingering effects, including higher job vacancies and a lower labor participation rate, could negatively impact medium-term potential growth.
The Federal Reserve raised interest rates by 25 bp in March, May, and July 2023. Fitch foresees one more increase, bringing interest rates to 5.5% to 5.75% by September. These actions will shape the country's economic outlook in the near future.