Our regional and global Credit Conditions Committees—and the research publications we produce—provide financial market participants around the world with an essential resource for identifying and understanding prevailing and potential credit risks.
As an assessment of the external operating environment, our regional and global Credit Conditions Committee forums—covering Asia-Pacific, Emerging Markets, Europe, and North America, which cascade into our global coverage—form an integral part of S&P Global Ratings’ credit rating analysis.
At the CCCs, our senior researchers, economists, and analysts (covering corporates, financial institutions, insurance, structured finance, sovereigns, and U.S. public finance) meet each quarter to evaluate the trends affecting the current and future states of economies, industries, and credit markets. The CCCs identify base case and downside scenarios, and rank exogenous risks. These views are cascaded to our analytical teams to inform their rating deliberations.
Our quarterly and special CCC reports crystallize the Committees’ conclusions, backed by a host of proprietary data, and with an eye toward helping investors make decisions—providing financial market participants around the world with a primary resource for identifying and understanding prevailing and potential credit risks.
Resilience: Most economies have seen solid growth in 2024 so far, while upgrades have outnumbered downgrades year-to-date among corporates, financial institutions, and sovereigns. But this may prove a high point because we expect growth to slow in the year's second half while rates remain elevated. Regional differences in the pace of cuts will produce rate divergence globally, which could add to volatility and capital outflows to higher-yielding locations.
Defaults to slowly subside: The descent through next March will be slower than the recent rise in defaults. Softer economic growth and still high interest rates will pressure low-rated corporates in consumer-related sectors and emerging markets. Over time, companies are refinancing more and more debt at noticeably higher rates, squeezing businesses’ headroom.
Geopolitical risks to the fore: A worsening geopolitical landscape, a more severe economic downturn, a longer-than-expected period of high rates, and growing threats to global trade could derail our base case and lead to weaker business activity and market liquidity.
Overall: Borrowers in North America could enjoy more favorable credit conditions if the U.S. economy settles into a soft landing and the Federal Reserve begins to ease monetary policy. However, credit deterioration could linger with interest rates likely staying high for longer than we previously anticipated.
Risks: On top of the downside risk posed by prolonged high financing costs, input-price pressures persist, and commercial real estate losses could worsen amid cyclical and secular headwinds. U.S. elections could lead to market volatility and policy uncertainty.
Ratings: The region’s net outlook bias was negative 10.2% as of June 11, with telecom, consumer products, and chemicals having the highest negative bias. We expect the U.S. default rate to fall slightly to 4.5% by March after peaking in the third quarter.
Overall: Our base-case view on the economic and credit outlook for Europe has not fundamentally changed from April. We expect growth will gradually pick up, even as the disinflation trend continues, and enable the European Central Bank (ECB) to return to a neutral policy stance by the third quarter of 2025.
Risks: Geopolitical risk--primarily related to potential spillovers from the wars in Ukraine and Gaza--represents the main systemic risk, although Europe's de-risking from China carries its own perils. The principal macro tail risks include a protracted period of slow growth or interest rates that remain higher for longer than we expect.
Ratings: Ratings performance remains balanced, with lower-rated borrowers benefiting from improving financing conditions, including market access. Pockets of risk remain particularly where fixed rate debt matures for overleveraged borrowers--typically in the 'CCC' category. Credit losses within the banking sector will likely normalize from a low level, while a few negative rating actions could emerge in residential mortgage-backed securities (RMBS) and auto asset-based securities (ABS). April's downgrade of Altice France S.A. (CCC+/Developing/--), which is present in 98% of European collateralized loan obligations (CLOs) that we rate, did not have any material rating impact on those CLO transactions.
China vs West. The trade conflict between China and the West is unfolding. We expect our rated China portfolio can absorb the direct impact from recent shots fired in the China-West trade dispute. However, intensifying tariffs could drag China's industrial production-led economic recovery, and potential retaliatory tariffs by China would widen the global impact. Such escalations could hit business activity and growth in export-centric Asia-Pacific. The region's growth should stay at 4.5% over 2024-2026.
Confidence dragging in China. Property sales and home prices are declining despite bolder stimulus, underlining very weak Chinese confidence. While strong manufacturing in the first quarter of this year lifted our 2024 growth forecast marginally to 4.8%, prospective conditions remain somber. We therefore see the China slowdown risk as high, but unchanged.
Walking a tight rope. A strong U.S. dollar is depressing Asian currencies. For importers and households, this can translate into costlier offshore debt borrowings and imported inflation. To stem capital outflows, the region's central banks are maintaining high interest rates. Onshore financing channels generally remain cheap and available, so far.
Gathering clouds. Asia-Pacific's credit conditions look stable. Our Asia (ex-China and Japan) credit cycle indicator (CCI) signals a credit recovery in 2025, but China and Japan see risks of a credit correction. Surprise election outcomes globally could cause shifts in political orientations and dilute policy predictability, causing volatility. The region's net rating outlook bias has deteriorated to negative 2%.
Credit conditions across emerging markets (EMs) continue improving amid resilient economic activity, supported by solid domestic demand, and improving global trade and financing conditions. The second half of the year could be challenging, as political noise from U.S. elections could sour investors' appetite for EMs' debt.
Policy uncertainty could exacerbate existing risks. Policy uncertainty will be a key factor late in the year and into 2025 as U.S. elections play out and new administrations in key EMs begin to execute their plans. Political noise could dampen investor sentiment and cause episodes of liquidity shortfalls or capital outflows. High borrowing costs will remain a key risk, as the Federal Reserve has pushed forward its plans for rate cuts, slowing monetary easing in EMs.
Expected resilience in economic growth for the rest of the year should maintain rating stability in 2024. Nevertheless, the potential for volatile financing conditions during the second half of the year could turn rating trends toward the negative territory.
While our forward-looking global and regional credit cycle indicators (CCIs) continue to signal a potential credit recovery in 2025, the momentum risks stalling should business and household confidence falter.
Divergences between population cohorts, and sectors, are deepening. Costlier debt and a slower macro could prompt corporates to tighten cost management and reduce jobs, and lenders to retract their appetite towards riskier sectors. Meanwhile, high mortgages and sticky inflation are causing households to increasingly economize on their spending, slowing demand.
Together, these could spell margin and liquidity challenges for some corporate and household borrowers. The risk of a divergent recovery could widen the divide between winners and losers, leading to greater dissonance.
