April 2024 Edition

Welcome to Global Credit Insights. Every month, we bring you the top research insights from Morningstar DBRS, the leading provider of credit ratings and thought leadership on corporate and sovereign entities, financial institutions, and project and structured finance transactions.

Rating more than 4,000 issuers and 60,000 securities, Morningstar DBRS is one of the top four credit rating agencies in the world. To learn more, visit dbrs.morningstar.com.

Baseline Macroeconomic Scenarios for Rated Sovereigns

Expectations for U.S. growth have improved markedly since our December Update. U.S. growth is projected at 2.1% for 2024, a sizeable forecast upgrade from the weak median projection of 0.6% just six months ago. Most other major economy forecasts have changed only modestly.

Europe is expected to remain mired in weak growth of less than 1% in 2024 (with the exception of Spain and several other small euro area economies). Revisions to forecasts within Europe have been mixed, but slightly negative for the largest European economies in 2024 (Germany, France and the UK).

While the U.S. economy continues to defy expectations of a material slowdown and several emerging market central banks (particularly in Latin America) have begun easing cycles, most of the world economy continues to struggle with weak growth.

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Consumer Loan Paradox: U.S. Consumer Finances Still Healthy, DQ's Rising

While the growth of disposable personal income slowed in 2H23, it surpassed the growth in household debt both in 2023 and on average over the past five years. As a result, consumer leverage (household debt-to-disposable income) has remained below the pre-pandemic five-year average, suggesting that on aggregate, consumers have not overextended themselves on undertaking indebtedness. This mostly stable leverage may have helped U.S. consumers partially moderate the pressures on their finances from the higher interest rates and inflation.

Since the middle of 2023, wage gains across all income levels have exceeded inflation resulting in real income growth for most households. This trend, if sustained, would help support consumers' disposable income and enhance their debt serve capacity, both of which are beneficial to the credit performance of consumer lender portfolios.

U.S. banks and NBFIs are well positioned to withstand further deterioration in credit performance in certain consumer loan portfolio segments due to the fairly healthy state of U.S. consumer finances, as well as the tighter credit underwriting of the past several quarters, both of which are generally supportive of current credit ratings for consumer lending-focused financial institutions.

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Baltimore Bridge Collapse

The collapse of the Francis Scott Key Bridge will affect several industries. Specifically regarding the automotive industry, the Port of Baltimore mostly handles vehicle imports and is among the busiest in the U.S. for passenger cars and light trucks, with more than 847,000 vehicles moving through the port in 2023. However, we note that automotive shipments in the U.S. are handled through numerous ports, with Baltimore, despite being the single largest automotive port, estimated to have accounted for a manageable 11% of overall U.S. automotive imports in 2023.

We anticipate the OEMs to be expedient in rerouting shipments (including automotive vehicle exports and parts/components) affected by the bridge collapse. Accordingly, and taking into consideration the strong financial profiles across the automotive sector, we do not expect the bridge collapse and the current closure of the port to result in any material credit risk escalation or rating actions.

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U.S. RMBS Frontline Perspectives

Benchmark Treasury yields surged higher over the past week, but the 30-year mortgage rate stayed contained, dipping 8 bps WOW to 6.79% according to the Freddie Mac Primary Mortgage Market Survey data release last week (March 28). Mortgage rates may be pressured higher over the next week because of the curve selloff.

The revised Q4 2023 GDP came in slightly higher at +3.4%, remaining resiliently brisk despite ongoing inflation and higher rates. The University of Michigan’s consumer sentiment survey's final number for March was 79.4, rising MOM from 76.9 in February. The various survey index components for expectations, conditions, and inflation were mixed MOM.

Non-QM pool DQs in aggregate rose based on the March statements, gaining a WA 21 bps MOM to 5.09%, picking back up on the rising trend from last year, but still tracking within projected ranges.

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Germany: Tough Budgetary Choices Ahead

General government gross debt stood at a moderate 65% of GDP at end-2023 which is below the levels in other G7 countries and broadly in line with the average debt of Morningstar DBRS AAA peers. While Germany's budget balance is weaker than in pre-COVID years, the size of current and projected budget deficits is relatively moderate. The debt brake limits annual structural net borrowing of the central government at 0.35% of GDP which is currently exerting pressure on the government to consolidate.

Tax revenue growth is projected to be constrained by the decrease in the economy's potential growth rate on the back of a shrinking labor force over the next decade. On the expenditure side, the recent step-up both in climate and defense spending as well as rising ageing costs raise budgetary pressures. The current government ruled out tax increases, changes to the debt brake, and public pension entitlements in its coalition agreement.

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Ontario's 2024 Budget: Larger Deficits Amidst Softer Economic Growth

The Province of Ontario (Ontario or the Province; rated AA (low) with a Positive trend) released its 2024 budget on March 26, 2024. Ontario's near-term fiscal outlook has deteriorated, with the government opting to invest heavily in capital priorities amidst weaker economic projections and stalling revenue growth.

For 2024–25, the budget projects a deficit of $9.8 billion after incorporating a $1.0 billion reserve. On a Morningstar DBRS-adjusted basis, after including capital expenditure (capex) as incurred rather than as amortized and assuming some modest capex underspending, this equates to a deficit of $22.0 billion, or 2.0% of GDP.

A large capital program and subdued economic growth assumptions are delaying a return to balance. The Province anticipates returning to a small surplus ($0.5 billion) in 2026–27, representing a Morningstar DBRS-adjusted deficit of 1.0% of GDP.

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