Baseline Macroeconomic Scenarios for Rated Sovereigns: December 2022 Update

This commentary provides an update to DBRS Morningstar’s Baseline Macroeconomic Scenarios. These baseline scenarios provide our estimate of the current market consensus, and are drawn from a simple median calculation across various external contributor forecasts. In this update, we discuss the ongoing monetary tightening and bleak outlook for 2023.

Key highlights include:
-- Forecasts for 2023 have deteriorated in recent months. Growth will be very weak or negative for most major economies.
-- Inflation dynamics are improving slightly in North America but not in Europe or Japan. The major central banks outside of North America and China are likely to keep tightening.
-- 2023 will bring heightened macroeconomic risks as central banks attempt to engineer soft landings but gradually remove accommodative policies.

“A mild recession in the near term is unlikely to pose a significant risk to ratings,” asserts Thomas R. Torgerson, Co-Head of Sovereign Ratings at DBRS Morningstar. “However, if inflation remains stubbornly high and consumer demand holds up longer than expected, this could increase the risk of a more severe downturn in H2 2023 or 2024.”