Signs of a credit recovery should emerge in 2025. That's according to S&P Global Ratings' Credit Cycle Indicator, a forward-looking measure of credit conditions. However, the ongoing credit correction could persist through 2024. For more details about our proprietary CCI, see "White Paper: Introducing Our Credit Cycle Indicator," June 27, 2022.

Global

The Global Credit Cycle Indicator Suggests A Possible Credit Upturn Only In 2025

Our global CCI is showing signs of potential credit recovery in 2025 (see chart 1). That said, we believe the tailwinds from the post-pandemic recovery, stronger-than-expected economic resilience in 2023, and pushed-out debt maturities, may have pushed out the peak in credit stress (see "Global Credit Outlook 2024: New Risks, New Playbook," published on RatingsDirect on Dec. 4, 2023). Consequently, we anticipate the lagged effects of credit correction will persist through 2024.

Amid steeper funding costs and more selective lending, risks of further increases in nonperforming loans and defaults could shape credit conditions in 2024 (see "Global Debt Leverage: A 1% Financing Contraction Could Push Cashflow Negative Corporates To 13%," Oct. 16, 2023). In particular, we foresee the U.S. trailing 12-month default rate for speculative-grade corporates will rise to 5% by September 2024 (see "Default, Transition, and Recovery: Higher Rates For Even Longer Could Push The U.S. Speculative-Grade Corporate Default Rate To 5% By September 2024," Nov. 16, 2023). For Europe, we believe the rate will increase to 3.75% (see "Default, Transition, and Recovery: Elevated Interest Rates Could Push The European Speculative-Grade Corporate Default Rate To 3.75% By September 2024," Nov. 17, 2023).

Chart 1

Asia-Pacific

Asia-Pacific's Credit Recovery Could Take Place In 2025

With the recent upturn in the Asia ex-China, ex-Japan CCI picking up speed (see chart 2), we expect the region to see a credit recovery in 2025. The region's economies continue to grow, particularly for India and Southeast Asia. Rising credit appetite among lenders could spur credit availability as corporates seek to expand and households' propensity to spend returns.

However, interest rates look to stay higher for longer, and the risk of a global hard landing could hit confidence in the year ahead. Costlier offshore channels on the back of a strong U.S. dollar means more borrowers are turning onshore to finance, and this could continue. But onshore lenders could also become selective. Meanwhile, the property correction remains under way in parts of the region. A rapid intensifying of property strains could implicate banks, narrowing credit availability.

Chart 2

China:  We expect China's credit cycle to work through a recovery only in 2025. In our view, the credit correction that started since early 2021 will persist throughout 2024.

The China CCI continues to climb from a trough, supported by the upward trend in the corporate sub-indicator (see chart 3). This rebound underlines a pick-up in corporate indebtedness whereby lenders extend credit to nonfinancial corporates. However, China's property sector remains stressed despite recent stimulus measures. Households' propensity to spend has been weak post-pandemic, weighing on the country's economic growth momentum.

Meanwhile, spillover risks remain key around China's corporate leverage--the highest in the world. This is particularly acute for the country's state-owned enterprises (SOEs) (see "Global Debt Leverage: China's SOEs Are Stuck In A Debt Trap," Sept. 20, 2022 and "Global Debt Leverage: What If Chinese Corporate Earnings Further Decline?," Oct. 18, 2023). Intensifying credit pressures on corporates and local government financing vehicles (LGFVs) could hurt the capitalization of China's regional banks, and reduce credit availability (see "LGFV Strains May Inflict A RMB2 Trillion Hit On China Regional Banks," Oct. 18, 2023).

Chart 3

Japan:   The Japan CCI is bucking the global trend. As the indicator continues its broad downward trend (see chart 4), the country's credit recovery may occur later than that of its Asian counterparts.

Japan's gross nonfinancial corporate debt build-up continues to slow in local currency terms. This could be attributed to an ongoing credit correction whereby lenders are curtailing credit appetite. Meanwhile, low profitability among Japanese banks could keep credit appetite soft. Funding and liquidity pressures might mount for companies with relatively low creditworthiness; e.g., typically small to midsized (mostly unrated) companies), given their susceptibility to financial market conditions (see "Japan Corporate Credit Spotlight: Scant Room For Improvement," Oct. 18, 2023).

Chart 4

Emerging Markets

The CCI Is Now Signaling Potential For Improving Credit Conditions Could Occur In 2025

Over four quarters from Q1 2020, the emerging markets (EM) ex-China CCI trended upward and reached a peak of 2.3 standard deviations in Q1 2021. This pointed to potential credit stress from late 2022 to 2023 (see chart 5).

Instead, the year has been cushioned by resilient domestic activity, sustained fiscal stimulus and economic rebounds from the pandemic, along with manageable maturity walls-- which, however, have not eliminated credit challenges for 2024. With the latest data, the aggregate indicator has now reached its inflection point for most EM countries; the remaining countries in our sample are also close to this inflection point (Colombia, Indonesia, Thailand and Poland). Only Brazil's credit conditions look set to ease further over the next six to 10 quarters.

Corporates:   The corporate sub-indicator now displays its trough in Q1 2023 at -1.6 standard deviations, as corporate debt and equity valuations moderately rose in Q2 2023. Corporate debt increased in EM Asia while it kept on decreasing in Latin America, as funding costs remain high especially in international debt issuance.

Equity valuations moved heterogeneously: particularly strong in Chile, India and Turkiye. Still elevated interest rates combined with a softening in external demand will likely constrain EM corporate profits and capex in 2024.

Households:  The household sub-indicator increased to -1 standard deviation for the second consecutive month (-1.3 in Q4 2022), tighter than its corporate counterpart. Household debt particularly rose in EM Asia, where borrowing costs are less prohibitive, as policy rates are lower relative to Latin America and EM EMEA. Property prices are now slightly tilted upwards, with the most significant movements in Chile, Mexico and Turkiye further straining household purchasing power, in a context of still high inflation.

Chart 5

Eurozone

Credit Metrics Improve As Economic Growth Materially Outpaces Debt; House Prices Are The Weakest Variable

Our eurozone CCI reached a peak of 3.1 standard deviations in the second quarter of 2021 (see chart 6). Based on statistical precedent, this points to potentially heightened credit stress six to 10 quarters later, meaning in the period from the fourth quarter of 2022 to the fourth quarter of 2023. Yet, material credit stress has been relatively limited in Europe so far as growth in nominal GDP has significantly outstripped the growth in debt for nonfinancial corporates and households since the peak COVID stress in Q1 2021, albeit with material country variations (see charts 7 and 8).

Reviewing the five factors that comprise the CCI, the weak performance of house prices stands out. This is particularly so in Germany, the Netherlands and the U.K., where house prices have risen significantly since 2010 until hitting recent peaks. Since then, house prices in these countries have been falling at annualized rates of between 7% (Netherlands) and 11% (Germany) according to Bank of international Settlements (BIS) data.

Chart 6

Chart 7

Chart 8

North America

Near-Term Stresses Could Give Way To A Credit Upturn In 2025

The North American CCI looks to be rising from its trough reached in the fourth quarter of 2022 (see chart 9). This points to a potential credit upturn in 2025, considering that, historically, the CCI tends to lead credit developments by six to 10 quarters. Nonetheless, North American borrowers still face stresses heading into the new year as higher interest rates, the chance of a U.S. recession, and persistent cost pressures continue to be high risks to watch (see "Credit Conditions North America Q1 2024: A Cluster Of Stresses," Nov. 28, 2023).

We expect likely lingering effects on defaults and nonperforming loans from the buildup of debt leverage and asset prices during the pandemic era. By our estimates, the U.S. speculative-grade corporate default rate will rise to 5% by September 2024, from 4.1% in September 2023 (see "Higher Rates For Even Longer Could Push The U.S. Speculative-Grade Corporate Default Rate To 5% By September 2024 ," Nov. 16, 2023).

Corporates:   The region's corporate sub-indicator increased for two consecutive quarters, to -1.0 standard deviations, largely driven by improving equity prices. However, higher-than-expected borrowing costs, along with more severe profit erosion amid demand and inflation headwinds, could further pressure corporate credit. Companies at the lower end of the ratings scale may feel more severe liquidity strains if approaching maturities coincide with challenging financing conditions.

Households:   The household sub-indicator didn't move significantly overall--the household debt-to-GDP and housing price continued to trend downward in the U.S., while starting to rise in Canada. In the meantime, the financial health of consumers is weakening. In addition to the uptrend in auto loan and credit card delinquencies, the student loan payment resumption in the U.S. and the renewal of variable-rate mortgages under the prevailing higher interest rates in Canada are possible pressure points. In fact, the mortgage component is driving Canada's household debt service ratio to near its historical high, leaving households more vulnerable to shocks. A sharper-than-anticipated pullback in consumer spending could weigh more on the economy and lead to a jump in unemployment, causing more credit stress.

Chart 9

Appendix

Table 1

Related Research

• Global Credit Outlook 2024: New Risks, New Playbook, Dec. 4, 2023
• Credit Conditions North America Q1 2024: A Cluster Of Stresses, Nov. 28, 2023
• Default, Transition, and Recovery: Elevated Interest Rates Could Push The European Speculative-Grade Corporate Default Rate To 3.75% By September 2024, Nov. 17, 2023
• Default, Transition, and Recovery: Higher Rates For Even Longer Could Push The U.S. Speculative-Grade Corporate Default Rate To 5% By September 2024, Nov. 16, 2023
• LGFV Strains May Inflict A RMB2 Trillion Hit On China Regional Banks, Oct. 18, 2023
• Japan Corporate Credit Spotlight: Scant Room For Improvement, Oct. 18, 2023
• Global Debt Leverage: What If Chinese Corporate Earnings Further Decline?, Oct. 18, 2023
• Global Debt Leverage: A 1% Financing Contraction Could Push Cashflow Negative Corporates To 13%, Oct. 16, 2023
• Global Debt Leverage: China's SOEs Are Stuck In A Debt Trap, Sept. 20, 2022
• White Paper: Introducing Our Credit Cycle Indicator, June 27, 2022