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      Sovereign Outlook: Soft landing, turn of the global rate cycle balance fiscal and geopolitical risks
      FRIDAY, 15/12/2023 - Scope Ratings GmbH
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      Sovereign Outlook: Soft landing, turn of the global rate cycle balance fiscal and geopolitical risks

      Scope’s baseline for 2024 is for a soft landing for the global economy, a turn of the global rate cycle, fiscal pressure from an ageing population, green transition and defence needs, and ongoing geopolitical risk.

      Download the 2024 Sovereign Outlook.

      “Our forecasts point to above-potential global growth of 3.1% for 2024, the same as our 3.1% estimate for this year,” said Alvise Lennkh-Yunus, head of sovereign and public sector ratings. “On monetary policy, we do not expect rate cuts from G4 central banks by the spring of next year. Nevertheless, most central banks have already reached peak official rates, and the first cuts from the major central banks are seen beginning latest H2-2024.” Continued balance-sheet reduction and rate cuts may see further steepening of the yield curve.

      Scope enters 2024 with 10 Negative Outlooks (Austria, Belgium, Egypt, Estonia, France, Japan, Slovakia, Türkiye, Ukraine, and the US) and two Positive Outlooks (Ireland and Bulgaria) among its 40 publicly-rated sovereigns.

      Figure 1. Scope’s growth forecasts, summary, as of 15 December 2023

      *Changes compared with July 2023’s 2023 Sovereign Mid-Year Outlook forecasts. Negative growth rates presented in parentheses.
      Source: Scope Ratings forecasts, regional and national statistical offices, IMF.

      Risks to the 2024 global economic projections are balanced. Scope assumes an economic recovery in the euro area, with 1.1% growth (Figure 1). The growth of the US economy should stay strong at 2.2%, defying market pessimism. Conversely, the UK is seen growing a moderate 0.4%, China is expected to slow to 4.4% and Japan to 0.8%. Central and Eastern EU member states should recover to grow 2.5%.

      “Global growth and inflation will stay exposed to geopolitics: The world order is becoming increasingly multipolar,” said Dennis Shen, lead author of the Sovereign Outlook. “Any significant escalation of geopolitical risks next year could raise inflation and curb growth, although conversely there are scenarios in which some geopolitical risks may ease.”

      Inflation is expected to continue moderating but a further supply-side shock is a risk. Scope’s long-standing baseline is higher inflation for longer. “Our general expectation is for inflation to average above 2% for most economies next year, even as it continues under our baseline to moderate from 2022 highs,” Shen said.

      On debt sustainability, sovereigns are facing a gradual rise of their interest burdens as debt rolls over at higher refinancing costs. Fiscal challenges are especially meaningful for EU member states as fiscal rules are reinstated next year and structural spending pressures rise. Tighter financial conditions link to concerns around financial stability, even though the global system remains resilient.

      In 2024, emerging-market sovereign ratings should be better supported under expectations of Federal-Reserve rate cuts and a weakening dollar. Meanwhile, elections next year in the United States, the EU Parliament and the United Kingdom will play an historic role in determining institutional and economic-policy outlooks.

      “Climate and demographic change are rising challenges for debt sustainability and sovereign credit,” said Lennkh-Yunus. “Understanding such risks will furthermore prove increasingly crucial for sovereign-rating assessment in 2024 and beyond.”

      Download the global macro projections (Excel).

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