At the end of first-quarter 2019, 13.1% of our ratings on European corporates either had a negative outlook or were on CreditWatch with negative implications. This measure of negative ratings bias remains well below its long-term average of 21% and remained stable during the first three months of the year (see chart 1). The positive bias declined to a slightly lower 9.5% during the first quarter, suggesting that the number of downgrades could exceed the number of upgrades in the medium term.
The eurozone economy saw some weakness towards the end of 2018, partly due to a drop in external demand and some domestic one-off effects. Although we believe GDP growth could rebound in 2020, we recently lowered our forecast for 2019 to 1.1%. That said, the European Central Bank has postponed some aspects of its monetary policy normalization, meaning borrowing costs should stay lower for longer, supporting corporate credit performance. We expect a similar trajectory for economic growth in the U.K., although the still widely divergent possible outcomes of the Brexit process present potential downside for both the U.K. and eurozone economies. Some forward-looking ratings-based risk measures turned more negative in the first quarter of 2019.
Overall Net Ratings Bias Turns More Negative
By the end of March 2019, the positive ratings bias on European financial and nonfinancial companies was 9.5%, down from 11.8% a year earlier. The positive bias represents the proportion of companies that either had a positive outlook or were on CreditWatch positive. During 2018, this measure reached its highest level since before the financial crisis in early 2007, but it has since declined.
At the end of March 2019, our ratings on 13.1% of European financial and nonfinancial companies either had a negative outlook or were on CreditWatch negative. During 2018, the negative bias came close to its lowest level since the late 1990s, but it has since risen, ending March 2019 higher than its 11.9% level a year earlier.
As a result, the net ratings bias for European companies (that is, the positive bias minus the negative bias) declined to -3.6% (see chart 1). This means that downgrades could outnumber upgrades in the medium term. We note that the positive trend in net bias during 2018 was largely due to financials, whose net bias rose sharply into positive territory during the year. By contrast, the net bias for nonfinancial corporates was more stable and remained slightly negative through 2018. By end-March 2019, the net bias trend for both financials and nonfinancials turned more negative. (The trends in positive, negative, and net ratings bias are shown separately for financials, nonfinancials, and all European corporates in the Appendix.)
The aerospace and defense sector had the highest negative ratings bias, with our ratings on two of the six companies in that sector having a negative outlook or being on CreditWatch negative (see chart 2), giving a negative bias of 33%. The oil and gas sector followed, with a negative bias of 25%, up from 23% at the end of 2018. The negative bias in this sector has gradually increased since the first quarter of 2018. The retail/restaurants sector also had a relatively high negative bias reading of 23%, with some traditional retailers facing increasing competition from online counterparts.
Of those countries with 10 or more rated issuers, the most negative rating bias at the end of March 2019 was among corporates in Italy (35%). Cyprus was the country where corporates had the highest overall positive bias of 30% (see chart 4).
For European corporate issuers, ratings bias measures at the end of first-quarter 2019 suggested a better credit outlook than in the U.S., where the negative bias was higher at 17%, and the positive bias was only 6%.