2023: Your Questions on Our Answers

An incipient Chinese recovery, global disinflation, potential upside for the eurozone, and inevitably the ‘pivot’ debate were among the top questions posed at our recent round of Outlook events.?Plus – not in the above – the question that possibly worries me most right now.

One of the most interesting elements of our annual outlook tour are the questions we get from the audience.?This year’s audiences have not disappointed so far.

Our Rating Outlooks across asset classes are broadly back to a pre-pandemic stability, with just single-digit percentages of Outlooks on ‘Negative’.?In contrast, our Sector Outlooks for 2023 show a marked bias to ‘Deteriorating’.?

Rating headroom, prior downgrades, and recessionary mitigants explain most of the sector vs. rating gap, but questions at our Outlook events helped probe this gap, as well as how things may turn out better or worse than we estimate.

The most popular question surrounded the recent news that COVID-19 restrictions in China were being lifted, and whether we see implications for our forecasts, both in China and globally.?Importantly, our Economics team do not see grounds for a change to our 2023 China forecasts – manufacturing had continued at a healthy clip during shutdowns, and may actually initially see a near-term dip from illness-related absences.?Measures aimed at supporting the homebuilding market are positive, but the jury is very much still out on when robust confidence in the market - for homebuyers and for financiers alike - will return.?

A resurgent Chinese economy could also be bad news for Europe.?Any boost to export demand, notably for Germany, would face the offsetting force of greater competition for gas (also notably for Germany) in what we assume to be a second winter without Russian supplies.?Uncertainty and risks here also informed our cautious response to the question on whether we saw any green shoots of optimism in Europe from recent data – not something we see with the current economic constellation, including PMIs still lagging below 50,

?On whether concern was abating on inflation, another mixed bag.?While some headline measures are retreating, inflation is still driving the policy debate, with strong evidence that wages are now chasing prices in many developed market economies.?Services inflation in the US – whether or not you want to exclude rent – remains stubbornly high.

Linked to this were a series of questions around employment, and the degree to which rate hikes so far have made little, if any, impact on tight labour markets, despite the steepness and speed of policy rate increases.?Indicators show the situation remaining tight in the near future.?The much-watched Conference Board survey outlining the expectation of 98% of surveyed CEOs that the recession would be short and shallow does not portend huge layoffs.?

And the employment picture is a major factor in Fitch’s position on the much-discussed ‘pivot’ in rates anticipated by market signals.?Fitch’s house view is fairly simple – not least because of persisting inflation and continuing tight labour conditions, we don’t see a pivot in 2023, with, if anything, the risk of further increases in terminal rates on both sides of the Atlantic.

So which question matched my own concerns most closely??Usually in Outlook season, I’ve had been able to quote the same fixed income nightmare on standby – once the interest rate cycle turned, a buyer’s strike, with asset managers hoarding cash for massive redemptions.?Mercifully, the cycle turned and, despite the copious red ink of 2022 in market losses, institutional money stayed in the game, and my worst fears for credit losses were not realised.

My new nagging concern goes back to interest rates.?An excellent analysis from our Economics team lays out how much of the heavy lifting the ECB has done in absorbing government debt over the past several years. much moreso than the Fed.?Now that burden will shift back to the capital markets.?

The UK has shown how quickly the market can take control over the setting of market rates, when weak sentiment runs up against a wall of bond supply – which is why this chart remains one of my big concerns as we navigate another year with a war in Europe, pronounced stagflation and big swing factors from China’s policy maze to the US debt ceiling.

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Catch our ongoing series of Outlook events in Milan, Frankfurt, and virtually (with replays) from New York.?Visit our websites for more on our Outlook for 2023, including an Excel summary of every Sector Outlook, and a 20-page tour of asset classes and regions.