Escalating trade strife has heightened fears that economic conditions have worsened, with signs that businesses are curbing spending and financial market sentiment surveys weakening. As central banks—including the U.S. Federal Reserve and the European Central Bank—take more-dovish stances, issuers in many regions stand to benefit from declining benchmark borrowing costs. While we see little chance of recession in the world’s biggest economies in the next 12 months, the prospects for GDP growth have dimmed somewhat, given the direct—and, more importantly, secondary—effects of trade tensions.
S&P Global Ratings' Credit Conditions Committees meet quarterly to look at potential credit risks for borrowers emerging from imbalances and vulnerabilities in the global economy and financial markets. This quarter, the committees focused on the implications of the pause in financial tightening by authorities in, and slowdown in economic growth of, the major economies.LISTEN TO THE WEBCAST
North America Highlights
Escalating trade tensions have heightened fears that economic conditions in the U.S. have worsened, with signs that businesses are curbing spending and sentiment surveys suggesting investors are moving toward more defensive asset allocations. While most indicators of financing conditions remain largely supportive, deteriorating economic data and heightened global political tensions has led to concerns that credit conditions will become more difficult.
- What’s changed: Financial market volatility has increased and spreads have widened for borrowers up and down the ratings ladder.
- Risks and imbalances: Escalating trade tensions, and tit-for-tat retaliatory tariffs between the U.S. and its major trading partners remain a threat to global trade and investment.
- Macroeconomic conditions: Of the 10 leading indicators of near-term U.S. economic growth we track in our monthly Business Cycle Barometer, five are positive, three neutral, and two negative.
Latin America Highlights
Optimism is fading despite the Federal Reserve's more dovish tone and the possibility for lower interest rates in the U.S. later this year. Political challenges have been materializing in Latin America's largest countries, and new administrations are facing waning domestic investor confidence as policy uncertainty prevails. Financing conditions, however, have improved compared with the first few months of the year, and highly rated corporations have taken advantage to issue debt with favorable terms. Overall, we expect volatility to continue, driven by trade tensions and domestic policy uncertainty; these conditions will weigh on economic growth expectations.
- What’s changed: Policy uncertainty in the region's largest countries is becoming more acute, undermining investor confidence and economic growth prospects. On the other hand, the Fed is now leaning towards a more accomodative monetary policy. We now expect the U.S. interst rates could fall 25 basis points in September. The latter is driven by weaker economic prospects in the U.S. as trade spats escalate and fiscal stimulus fizzles. Geopolitical tensions in the Middle East and likely slower global economic growth for the next year also weigh on investor decisions for Latin America.
- Financing conditions: We expect financing conditions in Latin America to reamin supportive, particularly because the Fed has made it clear that rates will remain low. However, market liquidity can erode rapidly upon negative news, specifically related to trade or geopolitical tensions. On the positive side, we expect issuers to continue taking advantage of improving conditions to refinance their maturities and could even anticipate for those that come due in 2020 and 2021.
Heightened near-term (mainly geopolitical) risks are feeding uncertainty and weighing on economic fundamentals notwithstanding the Fed’s and ECB's easing bias. Overall, the outlook for ratings has a more negative tilt after its recent gradual decline.
Financial markets have welcomed the proactive policy response of the Fed and ECB to counter the risk of an accelerating trade-induced slowdown in the global economy. How long this persists in the face of heightened uncertainty and growing nearterm risks remains an open question.
- Risks and imbalances: The geopolitical and political landscape is becoming more divisive and unpredictable. This raises the risk of unintended consequences with Brexit, trade, and fiscal imbalances in Italy being the most material known risks for the region.
- Macroeconomic conditions: The EU growth outlook remains subdued mainly due to external demand weakness, with domestic demand held up by a vibrant labor market and high capacity utilization. We see no signs of inflation picking up anytime soon.
- Financing conditions: The macroeconomic outlook will prevent the ECB from raising rates until second-quarter 2021 in our view. While beneficial for servicing and raising debt, this also reflects the underlying economic fragility across the system and presents business challenges for banks' profitability, insurers' earnings, and activity in structured finance.
Uncertainty has returned to Asia-Pacific's credit conditions. The year started optimistically on the back of the Federal Reserve’s reversal of its tightening stance and Chinese authorities' willingness to loosen credit supply (albeit carefully) to avoid a rapid economic deceleration. However, the recent increases of tariffs by first the U.S. and then China has shaken investors’ confidence.
- What's changed: Investor sentiment is tilting 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 impact on markets. Other top risks include corporate refinancing and market liquidity, property repricing, and China's debt leverage.
- Macroeconomic conditions: The cyclical slowdown in Asia-Pacific trade stems from dampened demand growth across major economies; this is curtailing GDP growth.
Global Banks Midyear 2019 Outlook
Credit conditions remain supportive for banks globally going into third-quarter 2019, even if the trade battle between the U.S. and China as well as geopolitical tensions are undermining confidence and economic momentum across the globe. It has prompted the U.S. Federal Reserve and the European Central Bank to recently take a more dovish stance, leading to financing conditions that remain broadly supportive for banks worldwide. That said, "low for longer" interest rates and increasing competition from nonbank players, including fintechs, are putting more pressure on bank profitability and business models.
- Credit conditions remain supportive for banks going into third-quarter 2019, even if trade and geopolitical tensions are undermining confidence and economic momentum.
- The Fed’s and ECB’s responses to counter the slowdown are positive for banks’ funding conditions but continue to call into question their business models given that margins will remain low for longer. The pressure on profitability is higher in Europe and Japan.
- The vast majority of outlooks on banks is stable globally, and the bias has become less positive in Europe.
- Credit losses have likely bottomed out in many countries, while capitalization is unlikely to improve further.