A scenario of sustained elevated inflation and stagnant economic growth would be a medium to high risk for airline, auto, diversified manufacturing, and transportation and logistics sectors, said Fitch Ratings in its Fitch Wire+ report on stagflation risks to US industrials. Continued supply chain challenges and rising interest rates would add to this risk for some issuers. “The most at-risk issuers in our portfolio are those that are highly leveraged and have low leverage headroom, relative to current ratings,” Fitch said.
Russia’s invasion of Ukraine and resulting sanctions are having spill-over effects in the global economy that, if prolonged, could negatively affect credit profiles across these sectors. Russia and Ukraine are meaningful producers and exporters of oil, gas, metals and minerals.
Energy and other commodity-based raw material costs, including steel and aluminium, accelerated since the invasion and pricing power would likely deteriorate for economically sensitive sectors if there is a sharp deceleration in economic growth.
Stagflation is a plausible downside to our economic forecasts but is less severe than the adverse case scenario contemplated in our March 2022 Global Economic Outlook (GEO). The GEO updates our base case economic outlook to reflect the effects of the conflict. Average oil price assumptions and YE Federal Funds Rate forecasts for 2022 and 2023 were revised upward, while US GDP forecasts are now slightly lower at 3.5pc in 2022 and 1.6pc in 2023. Inflation risk and demand sensitivity are highest for airlines, increasing carriers’ vulnerability in a period of stagflation. Jet fuel typically represents 20pc–30pc of carriers’ cost structure and most US carriers are unhedged. “We view stagflation as mainly a medium risk for auto, diversified industrials and capital goods, aerospace and defense, and transportation and logistics sectors, due to moderate elasticity of demand and some operational and/or financial offsets,” Fitch said.