Credit Risk Scenario Analysis Series: Trade Uncertainty and Financial Stress

This article is written and published by S&P Global Market Intelligence, a division independent from S&P Global Ratings. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence credit scores from the credit ratings issued by S&P Global Ratings.

As countries grapple with shifting trade policies, tariff, and geopolitical tensions, businesses face heightened uncertainty that can disrupt supply chains, alter investment strategies and affect credit health. In this blog of the Credit Risk Scenario Analysis Series, we continue to assess the impact of credit risk across countries and industries under the latest macro-economic information and assumptions, using a combination of RiskGauge Model^[1], Macro-Scenario Model^[2] (MSM), and Global Link Model^[3] (GLM).

The Trade Uncertainty and Financial Stress Scenario, published in early-June, was developed to analyze the impact of persistent trade uncertainty on the propensity to consume and invest, through a degradation of confidence and accrued financial stress. This stress scenario assumes a strong consumer reaction and financial stress due to the uncertainty around tariffs, which triggers a mild recession in the United States.

• Tariffs:

­ April 2 tariffs assumptions for all countries except China. For mainland China we assume that non-Section 232 goods' tariff rate jumps from 64% to 125%.

­ Adjusted exports of goods down as a result of retaliation.

• Immigration:

­ Additional 0.5 million deportations on average annually until 2027.

• DOGE:

­ More government spending cuts and an additional 100,000 federal layoffs

• Financial stress:

­ Higher term premia and corporate spreads, higher volatility, lower equity valuations.

• Aggregate demand:

­ More severe shock to consumer spending, nonresidential and residential investment, inventory investment, and net exports.

• Monetary policy:

­ The Federal Reserve cuts its funds rate by 1.75%-2.00%.

In Figure 1, we compare the current probability of default (PD), as of June 2025, with the scenario PD. This gives us the expected deterioration or improvement on companies’ credit risk in the following one-year period. Under the scenario, the North American countries, i.e., US & Canada, will be most significantly hurt. This is followed by the European countries, where the median PD is expected to increase by approximately 9% to 17%. The Asia-Pacific countries will be relatively less affected, with an increase in median PD of less than 10%.

Figure 1: Relative difference between current and scenario median PD by country

Source: S&P Global Market Intelligence. As of June 30, 2025.

If we analyze the impact on various industry sectors by country, we find that the energy sector will be severely affected in most countries, due to the lower oil prices and reduced demands. In North America, construction and materials sector will also be badly affected, given its reliance on imports and the slowdown in construction investment activities. In Europe, the consumer and services sector will be the second most affected, caused by a spike in unemployment and reduced consumer spending. In Asia-Pacific, the entertainment and media sector will be affected even more than the energy sector, owing to the negative economic growth. The complete ranking of sectors impacted in the scenario can be founded in Table 1.

Table 1: Sector ranking per country (1: most affected, 13: least affected)