Fitch downgrades US outlook to negative from stable

“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 percent 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 percent 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 percent of GDP this year before scaling back to 11 percent 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 stabilizing 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.