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The main risks we're watching in 2024 include slower global economic growth and higher-for-longer interest rates as the maturity wall grows, as well as challenged real estate markets. Beyond 2024, heightened geopolitical tensions, physical and transition risks from climate change, and an accelerated technology transformation will likely shape the future of credit.

What We're Watching

Looking ahead at 2024 and beyond, conditions that issuers and investors could safely take for granted for a decade or more have been pushed aside. Borrowers across all asset classes will need to adjust to softer global economic growth and tighter financing conditions as the era of ultra-accommodative monetary policy comes to an end. 2024 will be a pivotal year as refinancing demands begin rising ahead of a sharp increase in maturities in 2025. Beyond that, the return of geopolitical risks on the front stage, combined with the need to address climate change and technology changes will require a new playbook for issuers and investors in the debt markets.

Global GDP growth is likely to slow significantly in 2024, as the lagging effects of tighter monetary policy and diminished consumer purchasing power work through major economies. We expect the U.S. to slip into a period of below-potential growth, with Europe bordering on recession, pain in China's property sector dragging on economic activity, and most emerging markets (EMs) also likely to grow below trend.

S&P Global Ratings Economics expects real interest rates and yields to remain elevated through next year, with the equilibrium real rates (consistent with economic balance) staying durably above levels of the past decade.

The Federal Reserve is unlikely to begin a cycle of policy-rate cuts before June. For North American borrowers, near-term relief seems unlikely as all-in borrowing costs look set to stay elevated and investors become more cautious. Similarly, as eurozone key rates could take a long time to fall, European issuers look likely to endure a year of adapting to the hangovers from high inflation, high rates, and high debt against a more uncertain and volatile geopolitical backdrop. And as major economies slow, the effects of rapid monetary tightening surface, and debt maturities pile up, credit conditions in EMs will likely deteriorate.

What We Think And Why

S&P Global Ratings expect further credit deterioration in 2024, continuing the diverging trends of resilience at the investment-grade level ('BBB-' and above) and downgrades largely at the lower end of the ratings scale—where close to 40% of credits rated 'B-' and below are at risk of downgrades.

With no clear signs that long-term yields will fall materially any time soon, financing conditions will likely continue to tighten in real terms in 2024. Borrowers have reduced near-term maturities, but the share of speculative-grade debt coming due rises significantly in 2025—making 2024 a pivotal year. For EMs in particular, U.S. dollar strength is compounding the pressures.

Defaults will likely rise further, to 5% in the U.S. and 3.75% in Europe, respectively, by September 2024, above their long-term historical trends. When faced with slower GDP growth, lenders typically become more selective or demand greater compensation for increased risk. This could contribute to default rates reaching our pessimistic cases of 7% in the U.S. and 5.5% in Europe.

Recovery prospects for corporate debt remain under pressure, as well. Even before macroeconomic concerns about higher-for-longer interest rates and uncertain economic growth, there was an expectation that bloated debt structures with high debt leverage and concentrations of first-lien debt and covenant-lite structures might weigh on recovery rates.

What Could Go Wrong

Our global and regional Credit Cycle Indicators suggest a credit correction will persist through 2024. We believe the tailwinds from the post-pandemic recovery, stronger-than-expected economic resilience in 2023, some degree of fiscal stimulus still in place, and pushed out debt maturities have delayed the peak in credit stress. A credit recovery looks unlikely to occur before 2025.

At the same time, much of the recent global economic resilience has been bolstered by governments' large fiscal stimulus. Given the associated increase in governments' debt leverage, policymakers will eventually have to unwind at least some of this support—especially given the cost of servicing debt in a higher-for-longer interest-rate environment. The scaling back of stimulus will likely weigh on demand and dent economic activity—and is complicated by upcoming national elections in more than 50 countries, both developed and emerging.

Beyond tight financing conditions and economic uncertainty, other risks could negatively affect our base case. More severe than expected stresses in global real estate markets and China's economic challenges could spill over to the broader economy and credit markets. Geopolitical tensions could create an environment prone to more event risks and volatility, threatening market and business confidence, having an impact on global supply chains, and fueling a renewal of inflation. Looking ahead, physical climate and transition risks will bear increasing financial, business, and human implications. Meanwhile, rapid technological change will create new risks and opportunities for global business and governments.

Writers: Joe Maguire and Molly Mintz