Global Sovereigns: Update to 2022 Outlook

As 2022 is well underway the course of the pandemic continues to determine the global economic and fiscal outlook. In spite of somewhat weaker activity data in December and January, economic growth appears to be accelerating as we move towards the second quarter. The risk still exists of a more dangerous virus variant, but it is also possible that, like Omicron, future variants will be less harmful to health, aided by progress with vaccinating populations and other antiviral advancements. DBRS Morningstar takes the view that while the Omicron variant is a reminder of how the pandemic continues to shape the recovery, it also illustrates how countries are adjusting and adapting in order to mitigate the pandemic's adverse health and economic effects. Many of the risks we pointed to in our February 2021 outlook have not (yet) materialized, and the baseline outlook for sovereign credit ratings is relatively stable, subject to the evolution of the Russia/Ukraine situation and other risks outlined in this commentary.

Key Highlights
-- The global economic recovery continues, but new risks are evolving, most prominently Russia’s military operations in Ukraine.
-- Three key risks cloud the global outlook – geopolitics, the pandemic, and rising inflationary pressures.
-- The outlook for sovereign ratings is relatively stable, but the latest developments in Ukraine suggest additional shocks are likely.

“As Omicron health fears ease, the effects of Russia’s military operations in Ukraine are the key sovereign ratings concern,” says Nichola James, Co-Head of Sovereign Ratings. “In addition to a European refugee crisis, countries such as Hungary, Latvia, Slovakia and Lithuania, as well as large European countries such as Germany, Italy, and Austria, are highly dependent on Russian natural gas. The current situation does not have immediate implications for DBRS Morningstar’s sovereign ratings, but will have consequences for economies, and could ultimately contribute to downward rating pressure."

Thomas Torgerson, Co-Head of Sovereign Ratings, added: “Additional shocks to inflation could have a substantial impact on inflation expectations. In the context of limited slack in labour markets, rising wages, and excess savings built up during the pandemic, central banks may have to move more aggressively on interest rates, which can in turn expose more leveraged households and firms.”