Credit conditions improve as healthy economic growth moderates financial stability and political risks

Global credit conditions will improve in 2018 amid healthy economic growth and a supportive funding environment, despite a buildup of financial stability risks and potential political and geopolitical flare-ups. Changing demographics, rapid technological change and climate change will present new credit challenges.

Six themes will shape credit conditions:

Growth: The global economy will maintain solid momentum through 2018. We expect G20 economic growth of 3.2% in 2018 and 3.1% in 2017, up from 2.5% in 2016. Accommodative monetary policy, lower fiscal drag and resilient sentiment will support growth in advanced economies, while growth-focused economic policies in China, stable commodity prices and trade recovery will support growth in emerging markets.

Financial stability: Funding and refinancing conditions will remain largely supportive in 2018. We see two main financial stability risks to our relatively benign baseline credit outlook: a sizeable and synchronous equity and asset markets adjustment, and risks arising from the buildup of corporate leverage globally.

Political and geopolitical risk: Despite abating euro area exit risks, regional and country specific political risks will continue to flare up and will remain a challenge for global credit in 2018 and beyond. These include Brexit negotiations; heightened uncertainty over US policy, particularly on trade; continued domestic policy tensions in Brazil and Turkey; and tensions with North Korea and the Middle East.

Technology and innovation: Financial technologies, artificial intelligence, machine learning, robotics, electric and autonomous vehicles and e-commerce will continue to transform production processes, business models and government regulation.

Climate change and sustainability: Stringent energy efficiency standards, carbon regulation and shifting consumer preferences could have material credit implications for high-emitting industries. Companies' capacity to adapt to a low carbon environment will affect their credit positioning. Natural disasters could affect the credit quality of the most susceptible sovereigns and local and regional governments.

Demographics: The demographic transition taking place over the next two decades will create many challenges for governments and commerce: reduced household savings rates and investment, dampened global economic growth and pressure on government finances and pension systems.

Long run credit impact will depend on reform progress

Although credit negative in the aggregate, the sector impact of population aging over the medium term will depend on policy action to improve labor participation rates, reform pension systems and encourage financial flows to partially mitigate the impact of aging on economic growth. The credit impact on particular sectors will also depend on how technology adapts to serve an aging population (e.g., autonomous vehicles). Demographic change will also create opportunities and will have credit positive effects for silver industries that cater to a larger share of aging populations, such as pharmaceuticals and biotechnology, leisure and travel, and retirement real estate. Finally, other demographic trends such as the rising middle class in emerging markets, increased female labor force participation rates and rising purchasing power and shifting consumption patterns of the millennial generation will additionally influence economic, political and credit developments across countries.

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