Global credit conditions will remain uneven in 2017, despite a stabilization of growth worldwide. In this report, we discuss six themes we expect to shape the global credit narrative in 2017, and possibly beyond. We also identify key sector exposures and assess the likelihood of positive and negative surprises.
» Global economic growth will stabilize in 2017, but remain at historically low levels.We forecast G20 global growth of around 3.0% in 2017 versus an estimated 2.6% in 2016, as advanced economies continue to exhibit steady growth and a number of emerging markets recover from recent slumps. Commodity prices, too, will exhibit higher average prices next year, albeit with limited upside. Stabilizing economic growth and commodity prices are supportive of revenues and cash flow for many sectors globally.
» “Low for longer” rates will support borrowing and refinancing conditions, but negative side effects are becoming more visible. We expect borrowing and refinancing costs to remain supportive of credit conditions in the coming 12 months, given only gradual interest rate normalization in the US and the perseverance of ultraloose monetary policy settings in most other major advanced economies. That said, low long-term rates are leading to rapid debt build-ups, as well as increases in underfunding of defined benefits pension plans, leading to credit quality deterioration.
» Political risk will remain an enduring challenge for global credit. Heightened political uncertainty emanating from a busy election schedule in Europe, the start of the UK’s formal withdrawal from the EU, and likely changes in policy direction in the wake of the US presidential vote are likely to affect economic and credit outcomes. Volatility in credit spreads and exchange rates because of political risk may affect the ability of some issuers to borrow or refinance their debt.
» The recovery in global trade will remain slow, due to the lack of global demand and increasing protectionist sentiment. Global demand is unlikely to improve sufficiently to reignite trade growth in 2017. Furthermore, a rising tide of protectionist sentiment will act as an additional drag over the coming years. Export-oriented sovereigns and corporates are most exposed to a weak global trade recovery.
» Accelerating global decarbonization efforts face near-term uncertainty given the election of Donald Trump as US president. The Paris Agreement went into effect in 2016, representing a key milestone for global climate action. The agreement should accelerate the adoption of greenhouse gas emission policies and tighter energy efficiency standards globally in 2017 and beyond. Over time, the transition to a low-carbon economy could have material credit implications for rated entities in a number of high-emitting industrial sectors, as well as sovereigns and regional and local governments, globally. However, the election of Trump as US president has added a significant degree of uncertainty in respect to US policy towards the Paris Agreement and how other countries might react if the incoming administration seeks to withdraw from the agreement.
» Technological innovation and disruption to challenge mainstream industry.Technological innovation and disruption will not materially change the way businesses operate in 2017 or even 2018. However, we believe that the next two years will see various technological advancements gather momentum in terms of strategy and investments, implementation and emergence of initial benefits. The pace of technological innovation also has the potential to create a more competitive landscape and disrupt supply chains across a range of industries.
» Risks to our outlook are skewed to the downside. In terms of negative surprises, the growing risk of a re-pricing of assets, or a loss of confidence in the ability of China to manage its deleveraging and rebalancing process stand out. Positive surprises are less likely. A renewed focus on fiscal expansion via infrastructure spending in advanced economies could provide a short-term tonic to global growth, although such a scenario would add to government debt and potentially lead to renewed debt sustainability concerns.