Ratings firm Fitch Ratings has released its credit outlook for the next 12-18 months, and it should be no surprise that it leads off with this observation:

New shocks centred on the eurozone are slowing the global recovery. The return of financial tensions in Q212, private-sector deleveraging, sizeable fiscal austerity measures in several member states and declining confidence are weighing heavily on short-term growth. Risks are skewed to the downside.

If you expected anything different, you haven’t been paying attention to the global economy for the past few months. But Fitch goes beyond the blindingly obvious with some interesting facts:

• The proportion of ratings with negative outlooks roughly doubled in the last six months in the sovereign, international public finance, financial institution and insurance sectors.
• The universe of highest grade ratings (‘AAA’ and ‘AA’) continues to shrink, with all eight global sectors experiencing reductions since the end of 2010. The sharpest decline occurred in international public finance, where eurozone sovereign downgrades had a negative knock-on effect and the high-grade rating segment halved to 26%.
• Risks are skewed to the downside, though lower oil prices could offer some respite.
• Some 12 advanced countries are on Negative Outlook and none on Positive Outlook,
• underscoring the direction of pressure on their ratings.
• The outlook trend for credit quality for North American corporates is becoming more negative as lower growth in the US, China and other EMs, as well as the developing recession in Europe, are bound to have a negative impact on revenues and profitability.
• [US] ABS [asset backed securities] should continue to demonstrate the highest level of rating stability among the four major SF [structured finance] sectors while uncertainty on the pace of recovery in the housing market will continue to weigh on RMBS [residential mortgage backed securities] ratings.

Fitch expects global GDP growth in 2012 to reach just 2.2%, down from 2.7% in 2011. For 2013, the firm forecasts growth of 2.8%, and for 2014 the growth forecast calls for an increase of 3.1%.

Fitch’s expectations are low — and they have not even factored in the looming US elections and the fiscal cliff. This is not shaping up to be a very good second half of the 2012.

Paul Ausick

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