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Global Credit Conditions Q3 2019: Ebbing Growth, Rising Risks

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Global Credit Conditions Q3 2019: Ebbing Growth, Rising Risks


Faltering growth: Economic growth expectations are faltering as political and trade tensions stymie investment plans and erode confidence. Global recession remains unlikely given renewed monetary stimulus, but lower-for-longer rates are heightening financial-sector risks. Credit quality is deteriorating in cyclically-sensitive sectors.

Tensions: Domestic political tensions – possible impeachment hearings in the U.S.; the Brexit imbroglio; elections and policy uncertainty in Latin America – are eliding with persistent global risks – U.S. and China trade and tech disputes; proxy conflict in the Middle East – to create a confidence-sapping climate of uncertainty. There is little prospect of immediate resolutions.

Policy response: Central banks have once again reached for the monetary policy playbook with widespread reductions in interest rates and renewed unconventional stimulus. This has helped underpin financing conditions and is likely to mean low interest rates and flatter yield curves persist into 2020-21. Absent further shocks, this is likely to prevent a global recession.

Risks for the long term: Nevertheless, this renewed stimulus poses longer term risks as it further encourages financial risk-taking through a hunt for yield, undermines financial sector profitability and exacerbates pension liability pressure. There is little sign that the stimulus has boosted investment intensions or confidence.

Global Economy | Down But Not Out

  • Global growth continues to slow as the weakness in manufacturing and trade with still-robust household spending persists. The main driver of this slowdown remains uncertainty around the U.S.-China relationship.
  • Major central banks have lowered rates to support growth and boost inflation, with actions characterized more as insurance cuts than an easing cycle.
  • We forecast a continued moderate pace of activity in the near-term with the balance of risks on the downside; labor market developments - still positive - will be key.
  • U.S.: We forecast U.S. growth to approach 2% in 2020-2021, close to its steady-state path. However, our Business Cycle Barometer shows near-term recession risks are rising. We now put the probability at 30-35% — more than twice what it was a year ago.
  • Europe: Key parts of the European economy are struggling – Germany, Italy and the U.K. amongst them –bringing renewed monetary easing and restarted QE. Overall, we see European growth slowing to 1.1% in next year, from 1.2% this year.
  • China: Activity continues to slow and we expect GDP to expand 6.2% this year. There are some signals that the Chinese authorities could allow growth to slow below 6% next year, which would be a welcome development given years of credit-fueled investment.

Credit Conditions | Global Top Risks

Regional Highligths

Asia-Pacific | China Slows, Trade Tensions Blow

  • Overall: Credit conditions are expected to be bumpy. Despite looser monetary policy, China's slowdown and U.S.-China trade tensions are adversely affecting sentiment. This is hurting revenue and profit growth and intensifying refinancing risk.
  • What's changed: Investor sentiment is becoming more cautious amid heightened geopolitical stress and slower economic growth.
  • Risks and imbalances: The greatest near-term risk is the strategic conflict between the U.S. and China, with its attendant market impact. Other top risks include corporate refinancing and market liquidity, property repricing, and China's debt.
  • Financing conditions: Headwinds have returned. Should investor sentiment sour interest spreads could rise, despite lower official rates.
  • Macroeconomic conditions: U.S.-China trade-tech tensions have intensified and regional growth has come in below our expectations.
  • Sector themes: Idiosyncratic factors are driving the continuing dichotomy in ratings bias trend between corporates (negative) and financials and governments (positive).

Asia-Pacific Credit  | Top Risks

Asia-Pacific Economics | Collateral Damage To Confidence

Asia-Pacific Economics | China Slowing

Europe | Lingering in the Lowzone

  • Overall: Weakening economic growth, political and trade tensions and ongoing tech disruption are pressuring credit quality. Renewed monetary policy efforts are likely to prevent a broader recession, but persistently low interest rates pose serious risks for financials and corporate pension liabilities.
  • What's changed: The ECB has gone ‘all-in’ to shore up growth and underpin inflation. While the Eurozone should avoid technical recession, it is acutely vulnerable to external shocks (trade, oil).
  • Risks and imbalances: Political risks remain at the fore, particularly global trade tensions and the increasingly vitriolic Brexit imbroglio. Greater market volatility is a growing global risk as credit risk premiums tighten in a low for longer rate environment.
  • Financing conditions:Monetary policy appears close to the point where lower-for-longer near zero rates provides minimal stimulus, but raise downside risks for financial sector profitability.
  • Macroeconomic conditions: Growth prospects continue to be scaled back as the manufacturing recession spreads to services and construction peaks, particularly in Germany.
  • Sector themes: The main areas of concern are around the impact of low rates (banks, insurance), Brexit (U.K. public sector entities in particular) and slowing global growth (corporates).

Eurozone Economics | Manufacturing Recession Spreading to Services Dampening Inflation

Eurozone | Growth Flatlining; LT Yields Grounded

Credit Conditions |  EMEA Top Risks

Latin America | Policy Uncertainty Undermines Growth Prospects

  • Overall: Growth prospects continue to weaken as policy uncertainty in the region's largest countries increases. We have consequently lowered our growth expectations for 2019 and 2020. Although looser U.S. monetary policy helps, external conditions remain challenging.
  • What's changed: Investment continues to slump in the largest economies as policy uncertainty prevails. Upcoming elections in Argentina, delays in key reforms in Brazil, and lack of clarity and polemic decisions in Mexico are acting as a drag on already fragile investor confidence.
  • Risks and imbalances: Domestic political challenges continue intensifying and are the main drag on investor confidence and economic growth in the region. External conditions all remain difficult given U.S.-China trade tensions and friction in the Middle East.
  • Financing conditions: U.S. monetary easing has improved regional financing conditions by enabling policy rate cuts. Not all have benefitted; appetite for lower-rated issuers remains limited.
  • Macroeconomic conditions: We have lowered our 2019 and 2020 growth expectations for major regional economies. This is due to ongoing weakness in domestic demand, adverse domestic political dynamics, and volatile external conditions.
  • Sector themes: Weaker growth is likely to dent corporations’ profits and bank’s asset quality.

Latin America | Policy Uncertainty Prevails

North America | Rising Recession Risk Adds To Trade, Rate Uncertainty

  • Overall: As U.S.-China trade tensions fuel fears of a recession, American consumers have so far propped up the world’s biggest economy. Also, U.S. financing conditions have generally improved over the course of the year.
  • What's changed: The chance that the U.S. will slip into recession is increasing. Of the 10 leading indicators of near-term U.S. GDP growth we look at, three are now negative.
  • Risks and imbalances: Trade and geopolitical tensions are leading to more frequent and intense bouts of market volatility.
  • Financing conditions: Borrowing conditions remain broadly supportive, but there has been a divergence between conditions for investment- and speculative-grade borrowers.
  • Macroeconomic conditions: While the U.S. expansion is now the longest in history, the economy is showing signs of slowing. Our assessment puts the risk of a recession starting in the next 12 months at 30%-35%—more than twice what it was a year ago.
  • Sector themes: Stalemate in trade negotiations has hurt business confidence, as evidenced by slumping capital expenditure growth and a contraction in manufacturing. Meanwhile, declining borrowing costs are pressuring lenders’ net interest margins and weighing on profitability.

Quarterly | Changes

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