Global credit risks abound, even as growth surprises

Stronger than expected U.S. economic growth is stoking uncertainty about the prospect of rate cuts in the year ahead — a growing unease that headlines a list of significant global credit risks, says Fitch Ratings.

“Demand and labour market data have continued to be strong despite high interest rates,” Fitch said in a report. “At the same time, risk assets rallied strongly over the first quarter and ratings trends were broadly positive.”

Yet against this stronger economic backdrop, global credit risks remain undiminished.

“There is now greater potential for a ‘no-landing’, where there are no rate cuts and economic imbalances, such as a wide fiscal deficit and elevated inflation, remain,” Fitch said.

While robust growth would underpin global credit strength in the short term, “the change in the interest rate outlook would raise the credit risk environment for rate-sensitive sectors, including real estate and financial institutions, and leveraged sub-investment-grade issuers with a higher mix of floating-rate debt,” Fitch said.

Additionally, there remain a number of other major global credit risks, including ongoing concerns about the health of the commercial real estate sector, China’s property market, and intensifying geopolitical turmoil.

“The secular shift in commercial real estate remains a key cross-sector risk and the geopolitical environment also maintains a negative risk bias given the potential for tail risk scenarios in Europe, the Middle East and Asia-Pacific,” Fitch said.

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