While global credit conditions remain broadly favorable, an escalating trade battle between the U.S. and its trading partners, notably China, in the form of billions of dollars in retaliatory tariffs are dragging down global investor confidence, spending, and economic growth. It's still unclear whether all involved parties will negotiate new trade terms or retaliate into an all-out trade war. Whatever the case, the actions thus far have infused broad uncertainty around the world.
The positive economic growth that continues in all regions--at differing speeds, of course--is tempered by what S&P Global Ratings has identified as Top Global Risks, including trade interruption and geopolitical tensions, the potential for asset-price volatility, Chinese debt overhang, and investor concerns about a turn in the U.S. credit cycle, which could lead to a liquidity pullback from emerging markets.
Our credit condition expectations by region are as follows:
The U.S. and Canada
Credit conditions remain broadly favorable, as the U.S. economic expansion continues, interest rates are increasing at a measured pace, and upcoming maturities appear manageable. The biggest threats to what's been a historic stretch of benign conditions are increasing—primarily the escalating U.S.-China trade dispute, along with rising corporate debt, upward pressure on borrowing costs, and imbalances in Canada's housing market.
Financing conditions remain favorable, with debt issuance holding up fairly well, the corporate distress ratio at the lowest in more than three years, upcoming maturities seeming manageable, and interest rates rising at a measured pace.
Europe, the Middle East and Africa(EMEA)
Credit conditions still remain favorable as the economy navigates recent shocks quite well. Still, nationalistic policies in the region over time threaten to undermine confidence that global institutions can cushion against unexpected systemic shocks as they arise. Trade and Brexit are two such policies with potential for widespread systemic impact.
Financing conditions still remain favorable, supported by the European Central Bank's accommodative monetary policy, particularly in the bank market, where lenders have capital to deploy. Even so, credit spreads have started to widen and investors are becoming more selective at the lower end of the rating spectrum. In the U.K., funding conditions appear tighter, mainly reflecting modest appetite for new borrowing by business and households.
Credit conditions continue to be favorable in Asia-Pacific but risks emanating from the U.S. are increasing. Trade interruption risk is on the rise as the U.S. and China impose 25% tariffs on each other. Meanwhile, there appears to be upward pressure on interest rates and spreads, and investor sentiment points to a potential turn in the U.S. credit cycle.
After improving for the past three quarters, financing conditions in emerging Asia--while still favorable--may start to face headwinds later in the year.
Credit conditions in Latin America remain broadly favorable, but downside risks are increasing. On the bright side, credit conditions in the region still benefit from GDP growth, which we expect to be higher this year than in 2017, although a bit lower than we previously forecasted. A combination of external and domestic factors has resulted in falling currencies and tighter financing conditions. Pressure on the region's currencies could begin weighing on inflation levels and result in monetary tightening over the next few months.
Financing conditions remain neutral to slightly favorable in Latin America, but will likely face headwinds in the second half of 2018, especially among nonperforming loans. As interest rates rise, countries with higher exposure to international funding may face additional capital flow constraints, as investors may allocate capital to higher yielding securities in developed markets instead of emerging markets.