Baseline Macroeconomic Scenarios for Rated Sovereigns: April 2023 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 deteriorating outlook for 2024. To date, we note that the March 2023 bank failures have had only a modest impact on forecasts. We continue to see considerable downside risks to the baseline.

Key Highlights:
-- Economic data has held up better than expected early in 2023, leading to some positive adjustments to 2023 forecasts. Nonetheless, forecasts for 2024 have been downgraded further as expectations of a downturn have been pushed farther into the future.
-- While a mild advanced economy recession will likely have a limited impact on rated sovereigns, we are concerned that the outlook is shifting toward a later but potentially more severe recession.
-- With central banks seeing continued pressure on core inflation, including from tight labor markets, the tightening cycle may ultimately last longer than expected.

“A mild advanced economy recession is likely to have a limited impact on rated sovereigns,” emphasizes Thomas Torgerson, Co-Head of Sovereign Ratings at DBRS Morningstar. “Nonetheless, we see rising risks of a delayed but ultimately more severe recession, brought on in part by a prolonged tightening cycle or other shocks.”