S&P Global Ratings' Credit Cycle Indicator (CCI), a forward-looking measure of credit conditions, is signaling a potential credit recovery ahead in 2025. However, an increasingly complicated macroeconomic landscape means the recovery could play out differently across markets and sectors.

Global

Credit recovery prospects are mixed across markets

The global CCI continues to signal a potential credit recovery in 2025, as the indicator emerges from the trough in early 2023 (see chart 1). This is occurring amid a backdrop of rate cuts by central banks and prospects for a soft landing in major economies.

There is positive momentum for the corporate sub-indicator from recovering earnings, stronger equity prices, and improving market conditions that support financing. However, the household sub-indicator continues to decline, suggesting ongoing deleveraging by households as elevated cost pressures bite into purchasing power. In many markets, real residential prices are still weak.

Increasing divergence among our regional CCIs spell different paths toward a credit recovery. The eurozone and emerging markets ex-China CCIs continue to rise from a trough. However, the earlier increase in the North America and some Asia CCIs is stalling.

For more details about our proprietary CCI, see "White Paper: Introducing Our Credit Cycle Indicator," published on RatingsDirect, June 27, 2022.

Chart 1

Asia

Asian CCIs are signaling diverging credit recovery prospects

China:  The credit and economic recovery is under pressure, given the country's deepening property crisis. China's CCI maintained its downward trajectory to almost one standard deviation below its historical trend (see chart 2), pointing to a deepening credit contraction. Amid tighter credit availability, weak and heavily indebted borrowers could struggle more to refinance, spelling higher risks of distress and defaults. Surviving businesses will seek to shore up balance sheets through debt reduction and cost-cutting. Softening sentiment will hit growth, labor needs and confidence.

For households, sliding house prices and weaker income prospects cause negative wealth effects, further eroding confidence. Meanwhile, rising burdens from restructuring LGFVs in poorer, debt-laden regions, could weigh on banks' capital and profitability. Consequently, banks could further tighten lending, curtailing credit availability and compounding strains in the economy.

Chart 2

Japan:  We see a credit recovery under way as the country's CCI emerges from its trough of negative 1.4 standard deviations (which comes after a prolonged decline, since peaking in first quarter of 2021) (see chart 3). While the CCI remains subdued compared with historical levels, credit growth could accelerate as more capital flows return to Japan.

With the Bank of Japan exiting negative rates, higher interest costs will strain borrowers' cash flows, especially small and midsized enterprises. To mitigate this, some Japanese corporates could choose to conduct asset sales to repay excess debt. This balance sheet repair could support credit profiles. Meanwhile, higher rates in the country could attract foreign investment flows. This points to widening financing options for some borrowers.

Chart 3

Rest of Asia:  The Asia ex-China, ex-Japan CCI is at 0.4 standard deviations below historical levels (see chart 4). Although the indicator has exited a trough since the first quarter of 2023, momentum is cooling on the back of an increasingly nuanced macro landscape. The region's credit and economic recovery narrative is mixed. Credit pickup is more pronounced in South and Southeast Asia (such as India, Indonesia, and Malaysia). The uptick in household and corporate debt underlines a credit expansionary phase in these markets, supporting economic growth and attracting investment flows.

The storyline is less rosy for South Korea and Hong Kong. Korea's relatively low debt growth reflects costlier debt, cautious business sentiment, and financial institutions' tightening control over household indebtedness. Hong Kong's proximity to and dependence on China means risk is spilling into growing property stresses, and capital market swings.

Chart 4

Emerging Markets

Our CCI still points to improved households and corporate credit quality in 2025

The CCI now reads -0.2 standard deviations below its long-term trend (see chart 5). The pace of its ascent--after hitting its trough at -1.6 standard deviations in fourth-quarter 2022--has eased, confirming a potential credit recovery could take place in 2025.

Tight corporate spreads and lower corporate yields have buoyed issuance for refinancing purposes year to date, both from a sovereign and corporate perspective. Recent Fed easing should lead monetary normalization across EMs, where needed, further easing borrowing costs and interest burdens. However, the high policy uncertainty and worsening geopolitical risk call for caution on potential heightened episodes of market volatility in the coming months. The latest data shows the indicator's trend is mimicked across all EMs, except for Malaysia and Thailand, which are taking a breather, and Turkiye, which is embarking on an easing trajectory.

Corporations:  The corporate sub-indicator hit its trough in first-quarter 2023 at -1.8 standard deviations below its long-term trend, and now reads -0.6, as corporate debt (as a percent of GDP) slightly increased in first-quarter 2024, exploiting market demand, even at the domestic level. This was particularly true in Chile and South Africa. Equity prices remained solid, as a relatively low default rate compared with advanced economies and manageable debt maturities feed support the credit resilience of EM corporate entities. Capex intensity, however, is still lagging, particularly in Latin America.

Households:  The household sub-indicator marginally increased to -0.5 standard deviations for the fourth consecutive month (-1.1 in first-quarter 2023), less than its corporate counterpart. Households' debt remained relatively constant, while property prices rose in Colombia, Mexico, India, and Poland. Price corrections were recorded in Malaysia, despite displaying solid property transactions, and Turkiye, which is dealing with restrictive monetary policy.

Chart 5

Eurozone

Leverage is stabilizing across Europe as economic prospects improve

Our eurozone CCI appears to have reached a trough (see chart 6). The leading components of the CCI, namely equity prices and the financing stress indicator, have moved in a positive direction for several quarters, while the momentum behind the decline in leverage for households and corporates appears to have stalled. Similarly, house prices have proved more resilient than we expected, with the notable exception of Germany. Considering the pick-up in residential mortgage applications, the price outlook has certainly improved, despite central banks only just starting to dial back interest rates.

After the correction, household debt-to-GDP reached 15- to 20-year lows in Italy, Spain, the Netherlands, and the U.K. In contrast, retrenchment has only been back to pre-COVID-19 levels in Germany and France, where household debt-to-GDP is not particularly high. A similar pattern is evident across major European countries in relation to corporate debt-to-GDP. The corporate debt ratio in Germany is typically stable and relatively low, suggesting that the combination of high inflation, slow real GDP growth, and disrupted supply chains could have increased the pressure on German corporates to maintain debt at the current levels, given the size of their industrial base and working capital needs. The situation in France is different since corporate debt-to-GDP remains relatively high, similar to early 2019 levels. We note, however, that the Bank for International Settlements' debt figures capture corporates' unconsolidated debt position and that intercompany loans account for a relatively high proportion of French companies' debt.

After three years of retrenchment and barring unexpected systemic shocks, the combination of low unemployment, some economic strength, easing financing conditions, and equity markets close to or at record highs could result in a more typical cyclical recovery over the next quarters, as signaled by the CCI.

Chart 6

North America

There are signs of a gradual and uneven credit recovery

We believe the trough in our North American CCI, which started to form in early 2023, signals positive credit developments in 2025 (see chart 7). However, the upward momentum seems to have stalled somewhat. Despite improving market conditions and equity prices in the region, U.S. corporate and household debt-to-GDP continued to decline and the same metrics for Canada also reversed the uptrend in the recent quarter, reflecting more subdued borrowings relative to GDP growth in the face of high financing costs. As the Fed and Bank of Canada embark on their monetary easing cycle, certain interest-rate sensitive sectors (e.g., real estate) may see some relief. Meanwhile, the previous rate hikes are still feeding through the system with lagged effects (e.g., rise in Canadian household debt payments as mortgage renewals kick in). Against the backdrop of slowing economic growth, the credit recovery will likely be gradual and uneven.

Chart 7

Households:  The household sub-indicator decreased to a new low, mainly driven by the contraction in household debt-to-GDP. While consumer spending has held up well, household financial health has been showing signs of deterioration, including new auto loan and credit card delinquencies that have steadily climbed to multi-year record levels in the U.S., and Canada's historically high debt-service ratios. Such pressure is likely more acute for the lower-income cohorts. Grappling with high prices and cooling labor markets, consumers could pull back more than expected, weighing more on the economy.

Corporates:  The corporate sub-indicator increased slightly—despite the decline in corporate debt-to-GDP, equity prices have risen. Continued earnings recovery and strong refinancing and repricing activity seem to pave the way for corporate credit to stabilize and improve. Nonetheless, highly leveraged entities, especially those sensitive to the health of the consumer, remain more at risk (see "Default, Transition, and Recovery: The U.S. Speculative-Grade Corporate Default Rate Will Continue Its Descent, Reaching 3.75% By June 2025", published Aug. 19, 2024).

Related Research

• Default, Transition, and Recovery: The U.S. Speculative-Grade Corporate Default Rate Will Continue Its Descent, Reaching 3.75% By June 2025, Aug. 19, 2024
• White Paper: Introducing Our Credit Cycle Indicator, June 27, 2022