What are the biggest risks to global credit in 2025?

As we look toward 2025, S&P Global Ratings sees a year of promise and peril. The descent in key interest rates and resilience in many major economies may deliver on the promise of more favorable credit conditions. However, intensifying geopolitical and trade tensions increase the peril present in an already tumultuous environment.

What we're watching:

Against the backdrop of declining interest rates and soft landings in many developed economies, S&P Global Ratings expects global credit conditions to remain generally supportive in 2025.

Companies have made good progress in pushing out debt maturities, which has eased near-term liquidity pressures on many lower-rated borrowers—buying them time if market volatility arises and investors become more risk-averse. More than three-quarters of speculative-grade bond and leveraged loan issuance in 2024 has been for refinancing or repricing. As of Oct. 1, there was just $144 billion of speculative-grade nonfinancial corporate debt maturing in 2025, 34% of which we rate 'B-' and lower.

The downgrade potential for speculative-grade issuers continues to slowly decline, as well. The negative bias (the proportion of issuers with negative outlooks or on CreditWatch with negative implications) has fallen below 18% for the first time in nearly two years. For investment-grade companies, the negative bias is below 10%.

We also forecast a decline in defaults. S&P Global Ratings expects the U.S. trailing-12-month speculative-grade corporate default rate to fall to 3.25% by September 2025, from 4.4% in September 2024 and a peak of 4.9% in April. In Europe, we expect a slower pace of improvement, with a default rate of 4.25% by September 2025, down from 4.7% in September and a peak of 4.8% in July.

What we think and why:

With easing inflation, resilient labor markets, and sturdy consumer spending bolstering economic activity in most developed markets, we expect steady growth next year. We forecast global economic expansion of 3% in 2025 as growth slows in the U.S. and China (the world's two biggest economies), the eurozone continues to recover, and emerging markets find their footing.

At the same time, we expect more monetary-policy easing to come, albeit at a variable pace among jurisdictions. And the descent will be slower than the rise, with rates certain to settle at higher levels than we saw during the long stretch of cheap money after the global financial crisis.

More broadly, S&P Global Ratings' Credit Cycle Indicator (CCI) is signaling a potential credit recovery in 2025. This forward-looking measure of credit conditions is showing positive momentum—a result of the continued rise in the corporate sub-indicator despite some offset by the household sub-indicator. The corporate sector is seeing recovering earnings and supportive financing conditions as interest rates begin their descent. However, households continue to deleverage amid caution over economic slowdowns and squeezed purchasing power.

What could change:

Any improvement in global credit conditions will be along a narrow path strewn with overlapping risks. Slowing economic activity, the prospect of resurgent inflation, and political polarization could lead to sustained bouts of market volatility.

The lowest-rated borrowers continue to face the strains of still-elevated borrowing costs, the lingering effects of permanently higher prices on consumer purchasing power, and heightened geopolitical uncertainty—most notably, increasing protectionism that will weigh on global trade.

The Russia-Ukraine war is approaching the end of its third year, and the conflict in the Middle East, along with domestic polarization in certain markets, could disrupt investment flows, roil financial markets, and force governments to increase defense spending amid already-stretched budgets.

Donald Trump's return to the White House will have wide-ranging ramifications—with a high level of uncertainty attached to his second term. On the trade front, the president-elect has suggested universal tariffs on all goods imported to the U.S. as well as sharply higher levies on all Chinese goods. In our economic forecasts, we assume he will use his executive powers to impose targeted tariffs on China by raising the bilateral (weighted average) effective tariff rate on Chinese imports to 25%, from an estimated 14% currently, and that Beijing would likely reciprocate with equivalent barriers on American exports to the country.

Such a scenario would almost certainly be inflationary in the short term—with consumers paying more for finished goods and companies facing higher input costs. Industries with highly engineered products dependent on China for specialized manufacturing will likely suffer most because these facilities are the most expensive to relocate and hardest to staff. This includes such products as semiconductors and electrical components supplied to technology companies and applies to utilities and power sectors focused on renewable energy.

If a diversification of global supply chains away from China is the result, this would have a global impact, with as-yet-unknown winners and losers, the potential for increased complexities in supply chains, and could reignite inflationary pressure in certain markets.

All of this could throw central banks' monetary-policy plans into disarray and disrupt capital flows. In particular, any curtailing of the U.S. Federal Reserve's rate-cutting cycle will likely prohibit central banks in emerging markets from easing monetary policy. Additionally, a stronger dollar would translate into domestic inflation for EMs, and make debt-service more expensive, in view of the preponderance of dollar-denominated debt.

The U.S. president-elect has also vowed to withdraw military funding for Ukraine, which will add to the pressures European governments face in supporting the country. And how he approaches the Israel-Hamas war, now in its second year, remains to be seen. Any additional escalation of the fighting could further disrupt supply chains and result in an energy-price shock that underpins inflation.

Meanwhile, policymakers are facing difficult budgetary choices. The cost of providing budgetary support to households and companies to face economic emergencies amounted to about 10 percentage points (ppts) of developed economies' GDP over the past four years. For 2024-2027, we project that larger advanced sovereigns will accumulate another 5 ppts of GDP in public debt. The descent in interest rates is slow, and the cost of servicing debt could remain elevated for longer than expected. Scaling back could prove particularly difficult at a time when new spending pressures are emerging in connection with security risks, trade conflicts, and increasing competitiveness.

CreditWeek, Edition 51

Contributors: Alexandre Birry and Gregg Lemos-Stein

Written by: Joe Maguire and Molly Mintz