Fitch revises US outlook to negative from stable

Ratings agency Fitch on Friday downgraded the outlook for the United States to negative from stable, warning of high debt and deficits made worse by the coronavirus downturn.

“The outlook has been revised to negative to reflect the ongoing deterioration in the US public finances and the absence of a credible fiscal consolidation plan,” Fitch said in a statement.

The US is home to the world’s worst coronavirus outbreak, which has caused tens of millions of layoffs and a historic 32.9 per cent collapse in GDP in the second quarter after businesses closed to stop the spread of COVID-19.

Though it expected the US would suffer a less-severe downturn this year than other comparable economies, Fitch said its decision to change its outlook reflected concerns of both mounting debt and policy gridlock.

“High fiscal deficits and debt were already on a rising medium-term path even before the onset of the huge economic shock precipitated by the coronavirus. They have started to erode the traditional credit strengths of the US,” Fitch said.

The agency affirmed the US’s AAA rating but said it expected government debt to hit 130 per cent of GDP by 2021.

The bill may stabilize from 2023, but only if interest rates remain low, and “it is uncertain whether very low market rates will persist once growth and inflation pick up,” and rising health care and social security costs could also threaten the stability, Fitch said.

Lawmakers in Washington passed the $2.2 trillion CARES Act in March to blunt the pandemic’s blow and are working on another massive spending bill.

Fitch predicted the deficit will hit 20 per cent of GDP this year before scaling back to 11 per cent of GDP in 2021 as the spending measures conclude.

“It is a truism that the US government cannot run out of money to service its debts,” Fitch said. “However, there is a potential (albeit remote) risk of fiscal dominance if debt-to-GDP spirals, posing risks to US economic dynamism and reserve currency status.” Adding to the uncertainty is the divided state of politics in Washington ahead of elections in November in which President Donald Trump is standing for a second term.

Fitch warned of the consequences if Congress and the White House can’t agree in coming years on a path to stabilising the US’s finances.

“Political polarization may weaken institutions and reduces the scope for bipartisan cooperation, hindering attempts to address structural issues... but also longer-term fiscal challenges,” the agency said.

US UNEMPLOYMENT: Jobless Americans are set to become poorer on Friday when extra unemployment payments expire, after Congress failed to reach a deal on extending the benefits even as the US economy deteriorates.

The $600 weekly payments made under the federal CARES Act to the tens of millions rendered jobless during the coronavirus pandemic have been credited with helping reduce poverty amid a downturn that caused a historic plunge in GDP.

But the $2.2 trillion congressional measure did not anticipate the resurgence in COVID-19 infections seen across the United States in recent weeks, which has hampered business reopenings and raised doubts about the country’s ability to stop the virus anytime soon.

Democratic and Republican lawmakers in Washington have failed to reach a deal to keep the benefits going, and the Senate went home for the weekend.

“We anticipate that we will have a bill, but we’re not there yet,” Speaker of the House Nancy Pelosi said.

Economists fear the virus along with the legislative dithering will cause great harm to the world’s largest economy.

“The rebound we expected in the second half of the year will likely be subdued, unless the virus can be contained and activity can resume,” Rubeela Farooqi of High Frequency Economics said.

“Without a more complete reopening, the economy is likely to suffer lasting damage, and the path back to economic health will be an even slower and more extended process.”

The economy shrank by an annualized rate of 32.9 per cent in the April-June quarter, the Commerce Department said Thursday, the worst since record-keeping began in 1947.

Hopes for a recovery were rising as business lockdowns to stop the coronavirus were relaxed in May and June, and government payments helped boost consumption.

Weekly jobless claims surged in March after the lockdowns began but then declined for months, according to Labor Department surveys.

Agencies