the globe as currencies

The effects of a weaker global economy are being largely offset by declining inflation and easing financial conditions, says Fitch Ratings, which is maintaining its neutral outlook for sovereign credit ratings in the second half.

The rating agency sees global sovereign credit conditions as “broadly neutral” for the rest of the year, it said in a report. Softer output growth and strained government finances are balanced by easing financial stress as monetary policy loosens in several major markets.

The chief risks to the balanced outlook are on the downside, Fitch said: geopolitical threats, the prospect of resurgent inflation, and its impact on financial markets could cloud the outlook.

“Further setbacks to the disinflation path in the U.S. could constrain the Federal Reserve from cutting rates, with adverse implications for global bond yields and [increased] upward pressure on the U.S. dollar,” the report cautioned.

In turn, these developments could disrupt improvements in emerging markets’ financing conditions.

In developed markets, governments’ interest costs continue to rise as debt matures and is refinanced at current bond market yields. As a result, Fitch forecast a stall in improvements to governments’ budget deficits and their debt-to-GDP ratios this year.

At the same time, risks arising from ongoing conflicts in Ukraine and the Middle East, growing tensions between the U.S. and China, and the threat of rising trade protectionism aren’t going away this year, the report noted.