On paper, everything about 2025 looks good. Inflation has returned to target levels in most major economies, labor markets appear surprisingly resilient and consumer spending remains steady despite having eased back from a post-pandemic splurge. The global economy is projected to grow 3% next year, and the multiyear doubt about a hard versus soft landing has been settled definitively by a landing so cottony-soft it hardly seems like a landing at all.
Analysts and researchers at S&P Global Ratings recently published a global credit conditions report. At first glance, the news looks good. S&P Global Ratings’ credit cycle indicator appears to be signaling a credit recovery in 2025 on the back of a strong corporate sector, and credit defaults are forecast to decline. While the danger of default is higher for speculative-grade issuers than for investment-grade issuers, even the downgrade potential for speculative-grade debt is forecast to decline. Corporate earnings have steadily grown due to improved profit margins, rather than increased sales. Companies have also done a good job pushing out maturities through refinancing.
Despite this abundance of positive data, worries regarding geopolitics, trade, real estate, climate change and cyberattacks persist. S&P Global Ratings Global Chief Economist Paul Gruenwald cautioned readers to “buckle up” in his economic outlook for the first quarter of 2025.
The second Trump administration is at the top of the list of factors driving uncertainty for economic and credit conditions. Despite a burst of equity market euphoria following the US presidential election, President-elect Donald Trump’s policies regarding trade could create macroeconomic turbulence. Proposed tariffs on all imported goods, as well as additional tariffs on goods from Canada, Mexico and China, could have inflationary effects in the US and be damaging to some industries. This would create a drag on US GDP growth in the near term and lead to problems for industries with highly engineered products that depend on imported semiconductors and electrical components. US tariffs could trigger retaliatory tariffs from trading partners that would affect a range of industries.
The sudden toppling of former President Bashar Assad’s regime in Syria after 50 years of autocratic rule is another reminder that geopolitical forecasting is tricky. Continued armed conflicts in the Middle East and Ukraine pose threats to supply chains and create a drag on government budgets. While markets continue to be remarkably sanguine about geopolitical conflict in 2024, there remains a risk of conflicts spreading and affecting critical industries such as oil and energy.
Beyond the immediate credit conditions forecast, analysts and researchers at S&P Global Ratings posed a range of questions confronting the world in 2025. Uncertainties regarding the pace of interest rate drops, the austerity agenda in Europe, China’s lead in clean technologies and increasing AI demand create doubt in an otherwise sunny macroeconomic picture.
Today is Tuesday, December 10, 2024, and here is today’s essential intelligence.
Source: Nathan Hunt (S&P Global)