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

Global

Credit recovery prospects remain mixed across markets

The global CCI continues to signal a potential credit recovery in 2025, as it emerges from the early-2023 trough (see chart 1). This is taking place just as economic soft landings are materializing across major economies, and central banks are lowering policy rates (see "Global Credit Outlook 2025: Promise And Peril," published on RatingsDirect on Dec. 4, 2024).

On one hand, the corporate sub-indicator is registering positive momentum as earnings growth improves, interest rate pressures ease, and financing conditions stay supportive. On the other hand, the household sub-indicator remains at a subdued level relative to its historical average, with signs of troughing. The lingering effects of higher prices continue to erode households' purchasing power; this underpins still-cautious sentiment and deleveraging by this cohort.

Increasing divergence among our regional CCIs suggest differing paths to a credit recovery. The North America CCI continues to rise from a trough. The eurozone CCIs coming from countries including Ireland, Italy, and Spain are still improving. Meanwhile, the earlier increase in the emerging markets ex-China CCI and some Asia CCIs is stalling.

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

Chart 1

Asia

Asia's credit recovery is at a crossroads

China:  The CCI continues its downward slump (see chart 2) as weak house prices and income prospects erode household confidence. Recent policy actions by authorities include some fiscal stimulus and changes to monetary policy. Lending by banks remains tight, as their capital and profitability are constrained. Stricter oversight on risk appetite toward some sectors raises refinancing challenges.

Chart 2

Japan:  We see an ongoing credit recovery as the country's CCI continues to rise from its trough (see chart 3). Supportive signals include a rebound in corporate credit demand and household leverage, and rising house prices. Japan's credit growth could accelerate amid a supportive economic and financing environment.

Chart 3

Rest of Asia:  While a credit recovery looks to continue (i.e., the CCI has exited a trough; see chart 4), momentum is cooling amid regional nuances. Credit expansion remains under way in India and Indonesia, underlining continued economic growth and capital inflows. However, credit demand in Korea and Hong Kong remains soft. Costlier debt, cautious sentiment (for instance, in the commercial real estate sector), and risk control by financial institutions contain debt growth in these markets. More specifically in Korea, the country's recent political turmoil weighs on property market sentiment and activity, further squeezing credit demand.

Chart 4

Emerging Markets

U.S. protectionism will challenge credit recovery prospects in 2025

The CCI returned to positive territory after seven quarters (see chart 5), namely at 0.1 standard deviations above its long-term trend, led by the corporate sub-indicator, with the household counterpart down in the quarter. The pace of the CCI ascent--after hitting its trough at -1.5 standard deviations in the fourth quarter of 2022--has eased further, still hinting that a credit recovery could occur in 2025. Peaks and troughs in the CCI tend to lead credit stresses or recoveries by six to 10 quarters.

Falling policy rates and forecast steady--albeit slowing--economic growth are credit positive for emerging markets (EM). However, U.S. protectionism is a downside risk to EM GDP growth, especially for some Southeast Asian economies such as Malaysia and Thailand. These economies are trade-oriented, are vulnerable to weaker Chinese growth, and run large trade surpluses with the U.S. Moreover, with fewer likely policy rate cuts from the U.S. Federal Reserve, EM central banks will adopt a more cautious stance, limiting declines in corporate yields (+55 basis points since September 2024).

The latest data shows the indicator's trend is uneven across countries: with the exception of Chile, Latin America tightened, while emerging Asia eased mildly, when excluding India.

Corporations:  The corporate sub-indicator hit its trough in the first quarter of 2023 at -1.7 standard deviations below its long-term trend. It now reads -0.3. Equity prices increased in emerging Europe, buoyed by a low default rate and manageable debt. In contrast, equity prices in Latin America fell alongside prudent capital spending. Corporate debt (as a percentage of GDP) increased only in Brazil and Mexico in the second quarter of 2024. In contrast, it decreased across the other EM countries, as bond issuance slowed over November and December 2024 following a tightening in corporate yields and heightened global policy uncertainty.

Households:  The household sub-indicator marginally decreased to -0.5 standard deviations, lower than its corporate counterpart, interrupting the progressive ascent that began in the fourth quarter of 2022 (-1.0 standard deviations). Households' debt has been moving sideways over the past three quarters, while property prices rose in Chile, Mexico, India, and Poland. Property price corrections were recorded in Colombia, Malaysia, South Africa and Turkiye, where the credit correction continues.

Chart 5

Eurozone

Credit cycle poised to stimulate growth once geopolitical fog lifts

The eurozone CCI has ticked higher for the third quarter in a row, having troughed in the second and third quarter of 2023 (see chart 6). This points to the potential for household debt, in particular, to pick-up from depressed levels, supported by employment across the region remaining high and financing conditions (mainly access) improving. The components of the eurozone CCI show similar recovery trends across major countries since the pandemic. However, the longer-term patterns of these components since 2010 show notable differences among the countries.

Corporates:  Over the past 15 years corporate debt levels have fallen significantly. This has notably been the case in countries that suffered most during the global financial crisis, namely Spain (corporate debt to GDP -47% since 2010), Italy (-26%), and the United Kingdom (-27%). Corporate debt levels in Germany (92% of GDP) and France (153%) are relatively high. This situation is contributing to a subdued CCI in France, further exacerbated by the political uncertainty following the French parliamentary elections in June 2024. This uncertainty was reflected in a significant decline in the domestic equity market during the second quarter of 2024.

Households:  Households in the major European countries appear to have been quite cautious taking on debt since pandemic lockdowns. Consequently, their balance sheets are positioned to weather higher interest rates and help support the recovery as and when rates ease off. Spanish and Italian households are in the strongest position. In Spain's case, debt stands at only 45% of GDP as of the second quarter of 2024. In the case of Italy, it is 37% of GDP, albeit house prices have been notably weak over an extended period in Italy.

Chart 6

North America

Uneven credit recovery prospects in 2025

The North American CCI resumed its climb, albeit slowly, from the trough of early 2023 (see chart 7). This signals a potential credit upturn in 2025, supported by an economic soft landing and fairly favorable financing conditions. However, much of the region's credit recovery prospects hinge on policy choices and their implementation by the incoming Trump administration. For instance, significantly more protectionist trade and immigration policies could reignite inflation and force the Fed to recalibrate its monetary easing process, which could raise cost pressures, market volatility, and risk tightening liquidity. Meanwhile, the divergence between the corporate and household sectors has been widening, suggesting uneven recovery paths.

Chart 7

Households' credit correction continues:  The household sub-indicator decreased further, driven by lower household debt-to-GDP and weakening house prices. High price levels, the lagged effects of the previous rate hikes (e.g., a rise in Canadian household debt payments as mortgages get renewed), and cooling labor markets have been testing households' financial strength. A multiyear record level of new delinquencies in auto loans and credit card debt in the U.S., coupled with Canada's historically high debt-service ratios suggest heightened stress faced by certain cohorts (e.g., those on lower incomes). Consequently, the sector's credit recovery will likely take more time to pan out.

Corporates' recovery in sight:  The corporate sub-indicator increased steadily. Corporate debt-to-GDP appears to have bottomed out, and equity prices continue to rise. Projected earnings growth and supportive market conditions will likely pave the way for corporate credit to improve. In our base case, we expect the U.S. speculative-grade corporate default rate to decline to 3.25% by September 2025, thanks to falling rates, falling inflation, and lower upcoming maturities alongside a still resilient economy (see "Default, Transition, and Recovery: U.S. Speculative-Grade Corporate Default Rate To Fall Further To 3.25% By September 2025", Nov. 15, 2024).

Related Research

• Global Credit Outlook 2025: Promise And Peril, Dec. 4, 2024
• Default, Transition, and Recovery: U.S. Speculative-Grade Corporate Default Rate To Fall Further To 3.25% By September 2025, Nov. 15, 2024
• White Paper: Introducing Our Credit Cycle Indicator, June 27, 2022