My Money Life Interview | Hurricane Milton | Widening Middle East Conflict | Global Auto Outlook | Strong Issuance and Debt Growth

Welcome to the latest edition of Essential Economics! I had my twice-yearly “Big Interview” on Money Life with Chuck Jaffe where, amongst other things, I laid out our soft-landing baseline scenario for the US economy. We have lots of ratings implications research this week: our insurance and public finance teams look at the impact of Hurricane Milton, our sovereign team weighs in on the impact of an escalation or prolongation of the conflict in the Middle East, and our auto team looks at margin erosion resulting from more players and less profit. Finally, our credit research team tracks the continuing strong issuance in 2024, led by investment grade debt.

Money Life “Big Interview”

It’s always a thrill to be interviewed on Chuck Jaffe’s Money Life. Last week I had a wide-ranging discussion on US macro including our expectation of the first soft landing in more than three decades. I noted that the economy has been surprisingly resilient and that we expect that to continue unless the strong labor market falters or the bond market stops absorbing U.S. debt at low interest rates.

To listen to the interview, click here.

Hurricane Milton: Ratings Implications

Our Ratings insurance team writes that the damage from Hurricane Milton remains highly uncertain and could potentially match that of Hurricane Ian in 2022, which resulted in about $60 billion of insured losses. For our rated portfolio of U.S. property/casualty insurers, potential losses from Milton could fully deplete their 2024 natural catastrophe budgets, affecting underwriting margins and earnings.

Global reinsurers will feel the impact but we do not foresee Milton overstepping the sector's annual catastrophe budgets. In aggregate, our earnings assumptions for reinsurers should remain intact.

To read the report, click here.

Our public finance team also weighed in, sharing insights specific to Florida state finances and insurance mechanisms. Florida entered hurricane season with exceptionally high reserves totaling approximately 33% of operating revenue. In addition, it has a well-embedded emergency response apparatus to support short-term needs and enhance rebuilding efforts.

To read the report, click here.

Widening Middle East Conflict

Ben and team note that the Israel-Hamas-Hezbollah conflict has caused significant human tragedy, but the impact on credit metrics has so far been limited to Israel and Lebanon. We continue to assume a protracted, direct Israel-U.S.-Iran conflict will not emerge.

The recent escalation means we now think it likely that the conflict will persist into 2025, with greater potential for developments that could weigh on regional sovereign credit ratings.

To read the full report, click here.

Global Auto Outlook: More Players, Less Profit

Vittoria and our auto team write that growing affordability challenges and heightened competition have quickly made global automakers' reliance on premium vehicle sales a less effective buffer against margin erosion. Such reliance worked well to offset supply shortages over the past few years. Similarly, rated auto suppliers will find it harder to rely on increased content per vehicle to mitigate sluggish volume growth because of uncertainty over the pace of the transition to EVs.

The slowdown in vehicle electrification makes it challenging for suppliers to balance EV investment against volatile volumes and obtain compensation for foregone volumes and higher production costs. ?

To read the full report, click here.

Strong Issuance and Debt

Sarah and Evan report that the amount of global corporate debt rate rose by 3.3% in the 12 months to July 1, largely driven by 4% growth in investment-grade-rated debt; growth in speculative-grade stood at 1.1%. Financial services drove roughly 60% of the increase in debt. By region, debt grew nearly evenly across the U.S. and Europe, at 3.7% and 3.9%, respectively.

Favorable financing conditions led to strong primary issuance, especially speculative-grade debt issuance, which jumped as borrowers took advantage of strong investor demand.

To read the full report, click here.

Dubai Next Week: World Economic Forum

Next week I’m excited to attend the World Economic Forum’s Annual Meeting of the Global Future Councils 2024. This gathering will bring together over 500 experts, including the WEF’s Chief Economists Group. I intend to report back my takeaways and learnings next week. ?

As always, you can always find the latest research from the S&P Global Ratings Economics team here.