Precarious Balance – Global Credit Conditions
Amid an entrenched trade war, historic Asia-Pacific debt issuance, and a record U.S. economic expansion, world credit markets are being pushed and pulled in several directions.
Published: December 2, 2019
Global Highlights
Going into 2020, the precarious balance supporting global markets risks upset from slowing economic growth, deteriorating profitability, high debt, political uncertainties and mispricing of risk. Positive counterbalances include rates remaining lower for longer, resilient consumers and some fiscal expansion. Our base case is for a moderate slowdown, with a commensurate rise in defaults.
Lower rates and renewed unconventional stimulus will likely underpin 2020-2021 financing conditions, and prevent a global recession. Trade disputes, Middle East conflict, Brexit, and LatAm uncertainty drag on confidence. Longer term, the renewed stimulus poses risks as it encourages further risk-taking. Credit quality is deteriorating in cyclical sectors. Downgrade prospects are highest in the auto, energy, and consumer sectors.
For global economics, we see weaker manufacturing and trade but robust household spending and labor markets, boosted by central bank rate cuts. Downward growth momentum has eased; central banks now in wait-and-see mode. U.S. growth around 2% in 2020-21. Near-term recession risk has stabilized. Germany, Italy, and the U.K. are struggling, with renewed monetary easing. We expect China GDP to grow by 6.2% this year and 5.7% in 2020 as part of a needed slowdown.
Live Webcast And Q&A: Global Credit Conditions
Join our leading S&P Global Ratings analysts for a quarterly Global Credit Conditions webcast, where we will share our outlook 2020 at the macro and credit conditions levels, with an update on the key risks—slowing growth, deteriorating profitability and high debt levels risk tipping the scales, while low rates and resilient consumption offer support.
Asia-Pacific
It is a mixed outlook for credit conditions in Asia-Pacific going into 2020. Lower official interest rates (which, excepting Japan, are still in positive territory) are providing some sunshine in shoring up business and consumer confidence and delivering some debt-servicing relief to borrowers. However, we expect more rain in the form of declining credit quality and rising defaults particularly among nonfinancial corporates. Investor sentiment is likely to remain skittish, jumping between optimism and pessimism in response to breaking news.
Low rates continue to encourage bond issuance growth (through lower debtservicing costs) amid concerns of economic slowdown, political uncertainty, and global trade tension. While spreads are generally lower across the board, they have been widening between lower quality borrowers and higher rated counterparts, indicating investors' growing risk aversion.
Asia-Pacific Quarterly: The Cost Of Uncertainty
The threat of a sharp downturn across Asia-Pacific has receded over the past quarter. One reason for that is the readiness of policymakers to respond to sluggish growth and unpredictable geopolitical risks.
Latin America
We expect political uncertainty will result in another year of weak growth for Latin America in 2020, albeit it should improve moderately compared to this year. We don't predict subdued investment levels across the region to improve significantly in light of continued uncertainty about policies, slower global growth, and in some cases, social unrest.
Political challenges have become more acute in the region and 2020 may bring additional obstacles as the global economy weakens. So far, domestic policy response has been ineffective in encouraging resuming investment and in some cases taming social unrest. A relaxation of monetary policy has brought some relief to financing conditions, but so far not enough to boost growth.
We expect political uncertainty to remain our key risk for Latin America in 2020. It will be a challenge for governments in the largest economies in the region to resume investor and business confidence, and in some cases to deal with social discontent. Weak economic growth will add to the already challenging panorama. However, progress with respect to U.S. and China trade tensions, along with the potential approval of the U.S.-Mexico-Canada trade agreement (USMCA) could help boost confidence.
Latin America In 2020: Low Growth, Low Interest Rates, High Risk
Latin America is headed for another year of slow growth in 2020 as many economies experience some of their lowest growth rates since the global financial crisis. S&P Global sees the region growing less than 2% for a seventh consecutive year—with projected aggregate GDP growth of 1.5% for the six largest economies in the region, or LatAm 6, in 2020.
EMEA
The EMEA credit outlook for 2020 is finely balanced with slow growth and low inflation, buttressed by ongoing monetary policy support, countering an increasingly unpredictable and fractious external environment. These conditions will make it challenging for corporates to maintain earnings growth and for banks to improve profitability.
Monetary policy in the eurozone seems to be reaching its limit, placing the onus on governments to adopt more expansionary fiscal policies to counter austerity and help address inequality.
Political relationships and geopolitical event risks remain critical issues for 2020, particularly relating to trade and treaty change—notably tariffs and Brexit. However, political expediency in a U.S. election year may help limit material spillovers. In Europe, asset mispricing and market illiquidity could increase future market volatility.
The eurozone economy should continue to expand moderately in the coming year, supported by another rate cut in the first quarter on undershooting inflation. Weaker external demand remains the main downside risk to European growth. While eurozone corporate financing conditions are highly favorable, helped by strong competition in the bank market, corporate borrowing demand remains lackluster due to a mixed picture for fixed investment across the region.
Eurozone Economic Outlook: Consumers Won’t Give Up In 2020
The year 2020 should be another year of below potential growth for the eurozone, but not one of recession. We expect GDP to rise by 1.0% in 2020 and 1.2% in 2021 after 1.2% in 2019. S&P Global Ratings Research's recession indicator points to a receding risk of around 8% for the next 12 months.
North America
Tension between the U.S. and China has eased somewhat amid hopes that Phase 1 of a trade deal will come to fruition, but uncertainty remains and the dispute could still have longer-term consequences on global supply chains and business sentiment. The next steps in negotiations will be difficult, and although a mini deal between the U.S. and China seems possible, we doubt this will address longer-term issues over technology, intellectual property, and market access. In addition, protests in Hong Kong and responses from the U.S. Congress complicate matters.
The Federal Reserve has cut interest rates three times this year, which seems to have eased investor fears about a near-term recession and helped keep borrowing costs stable. We have lowered our risk of recession to the high end of the 25%-30% range from 30%-35% last quarter, largely based on the domestic economy. Financing conditions are broadly neutral but are more challenging for lower-rated companies. Across the rating spectrum, growth in debt concentrations has led investors and regulators to continue to focus on liquidity risks.
Fewer Signs Of Scrooge-ing Up U.S. Growth In The New Year
Even as U.S. economic growth slows—as fiscal stimulus filters out of the economy and the trade dispute with China weighs on business investment decisions—continued spending by American consumers looks set to prolong the historic expansion in the world's biggest economy.
2020 Vision
The global macroeconomic narrative has improved and steadied since our previous forecast. As we noted then, the combination of strong labor-market performance and household spending, and weak manufacturing was unstable. There were two paths forward. Either ongoing strength in the former would lead to a stabilization of the latter, or the weakness in the latter would drag down the former.
This tug of war appears to have been won by the labor markets and households. They remain strong while manufacturing has stabilized. The outlook for 2020 is therefore shaping up as, hopefully, unexciting steady-state growth in many advanced economies.
Further Reading
Global markets enter a new decade precariously balanced. Slowing growth, deteriorating profitability and high debt levels risk tipping the scales, while low rates and resilient consumption offer support. Our Outlook 2020 series explores the risks.