S&P Global — 6 September 2024
Daily Update: September 6, 2024
Credit Conditions Cautiously Upbeat amid Uncertainties
By Pam Rosacia
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As the third quarter of 2024 winds down, the overall mood in global credit markets is optimistic with a healthy dose of caution. Recession odds have decreased in most countries, inflation has moderated and central banks in major economies have started reducing interest rates. However, challenges remain on the horizon, including softer economic growth, a possibly prolonged period of high rates, geopolitical risks, rising trade protectionism and persistent pressure on real estate markets.
Credit conditions look promising globally, with some divergence across regions in achieving credit recovery in 2025. In North America, the credit outlook is seemingly brighter, and a possible credit upturn is forecast for next year. “Borrowers in North America could enjoy more favorable credit conditions if the [US] economy settles into a soft landing and the Federal Reserve begins to ease monetary policy,” according to S&P Global Ratings. The Federal Reserve recently hinted that its first benchmark rate cut could come as soon as September.
The US economy has seen relatively strong growth, but credit deterioration could persist if interest rates remain higher for longer. Other headwinds for US credit market recovery are lingering cost pressures that weigh on borrowers’ liquidity, declining commercial real estate valuations and the risk of market volatility returning as the November presidential election nears. Up north, Canada is forecast to see a moderate rebound in economic growth. The Bank of Canada made the first move among key central banks in cutting interest rates earlier this year; however, borrowing costs in the country are projected to remain high and exceed pandemic lows over the next two years.
Across the Atlantic, Europe is keeping calm and carrying on as uncertainties remain. “The European economic and credit environment continues to strengthen gradually, despite significant political and geopolitical uncertainty clouding the outlook,” S&P Global Ratings said. The region’s economy has eased into a soft landing, and eurozone rates are projected to return to neutral by the third quarter of 2025.
In Asia-Pacific, credit conditions look stable. While risks of a credit correction are possible in China and Japan, the rest of the region is forecast to see credit recovery in 2025. However, growing trade tensions between the West and China could have repercussions for the export-dependent region. Aside from tighter trade policies, continued property challenges are likely to drag credit conditions in China and slow its economic recovery, according to S&P Global Ratings.
Emerging markets are also a source of cautious optimism. “Credit conditions across emerging markets continue improving amid resilient economic activity, supported by solid domestic demand, and improving global trade and financing conditions,” S&P Global Ratings said. Risk factors during the second half of the year and into 2025 are high borrowing costs and political noise from the upcoming US elections, which could dampen investor appetite for debt in these markets.
Credit markets across the different regions are showing resilience against relentless risks. Most economies have seen steady growth this year, and credit conditions are picking up globally. In terms of rating outlooks, all regions had more upgrades than downgrades during the second quarter as aggregate credit quality improved from the first quarter. Global defaults have remained elevated in 2024, although they are forecast to gradually decline through March 2025, according to S&P Global Ratings.
Global economic growth is expected to slow for the rest of the year as sticky inflation and high mortgage rates could limit household spending. Some corporate borrowers could face mounting cash flow and liquidity pressures due to higher debt costs and weaker consumer demand. Diverging interest rates globally due to differing pace of cuts could also increase volatility and capital outflows to markets offering higher yields.
With less than four months remaining in 2024, “a bumpy ride is likely before a credit recovery in 2025,” S&P Global Ratings said in its quarterly credit conditions report.
Today is Friday, September 6, 2024, and here is today’s essential intelligence.
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—Read the article from S&P Global Market Intelligence
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—Read the article from S&P Global Market Intelligence
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—Listen and subscribe to the podcast from S&P Global Commodity Insights
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