Nearly two-thirds of credit portfolio managers expect a recession in the U.S. by the end of 2024, according to the latest quarterly survey from the International Association of Credit Portfolio Managers.
Sixty-four percent of respondents expect the U.S. to be in recession before the end of 2024, while 28% say they are not expecting a recession at all, and 8% say there will be a recession before the end of this year.
While the sentiment is pessimistic in the latest survey, it is less so than the previous survey last quarter, in which 56% of respondents said the U.S. would be in recession by the end of the year, while 33% forecast a recession in 2024.
Overall, credit portfolio managers are currently seeing limited evidence of current trouble in their portfolios, but they do anticipate problems within the next year, due to stubborn inflation and the resulting expectation for central banks to continue raising interest rates.
The sentiment in Europe is even worse, with 92% of respondents expecting a recession by the end of 2024, of which 13% said saying the Continent is already in a recession.
"It's hard to escape a recession (in the U.S.) if Europe is already in recession and rates keep rising in the U.S.," said Som-lok Leung, IACPM executive director, in a phone interview.
With the latest report in the U.S. on Oct. 12 that the consumer price index has held steady at 3.7%, Leung said it is difficult to imagine a recession will not be coming at some point in the near future.
"It just defies the typical relationships of economics," Leung said. "Is it possible that something completely weird happens? The future is not perfectly predictable, but it seems more and more likely that if inflation remains up, there will be a recession."
Leung said that credit portfolio managers are seeing defaults remaining low, although they do see some degeneration in their portfolios.
A significant majority of respondents forecast rising corporate defaults across the globe over the next 12 months. Seventy-four percent of respondents say corporate defaults will rise during the period in the U.S., down from 85% that had made that forecast a quarter ago, while 69% of respondents believe defaults will rise in Europe (down from 85% three months ago), and 50% in Asia (down from 55%).
The sentiment in Australia has improved markedly, with 35% of respondents saying defaults will rise over the next year, down from 76% in the previous quarter.
The survey's Aggregate Credit Default Outlook index for the next 12 months improved to -59.9 in the third-quarter survey from -78.1 in the previous quarter and -87.1 in the first quarter. A negative number indicates credit conditions are expected to worsen, while positive numbers mean conditions are expected to improve.
When asked to forecast how credit spreads will move over the next three months in certain regions and types of debt, 72% said they expect spreads to widen for North American high-yield debt (down from 77% in the previous quarter), and 64% expect spreads to widen for European high-yield debt (down from 72%).
The sentiment remains pessimistic for European and North American investment-grade fixed income, with 70% and 52% of managers, respectively, expecting credit spreads to widen in those areas over the next three months, compared with a respective 65% and 53% that expressed that sentiment three months ago.
The survey was conducted among IACPM members, who are credit portfolio managers at more than 135 financial institutions in the U.S., Europe, Asia, Africa and Australia.
