Global credit conditions are set to weaken next year as growth slows, liquidity tightens and market volatility returns, warns Moody's Investors Service.
The rating agency published Monday its annual Global Credit Conditions report for 2019, assessing the main themes that it expects to shape the coming year.
Moody's identified six main themes for 2019 in its report, which it said in some cases overlap.
The first theme was growth, with a forecast that advanced and emerging market economies will see a deceleration through 2019 and beyond — although the agency added growth still will be "solid" in advanced markets through 2019. Tightening monetary policy, worsening economic disputes and slower demand from China are set to dominate the weaker outlook for growth.
The second theme was financial stability, with Moody's citing tightening financial conditions as being set to weigh on funding costs and liquidity. At the same time, default rates will remain low, but an increase in corporate debt "signals future credit stress and increases late-cycle risks," said the report.
Also threatening credit conditions are political risks, with an expectation that geopolitical and domestic political risks presenting the greatest source of uncertainty to credit conditions. "In our view, rising U.S.-China tensions will extend far beyond trade disputes, while the potential has risen for a 'no-deal' Brexit in which the U.K. leaves the European Union without a withdrawal agreement in place. Rising populism will increasingly influence political debates and policymaking," said the report.
The fourth theme, linked to political risks, was trade tensions. "The most potent, far-reaching source of global risk is U.S. trade policy, which will have significant sector and regional impacts and could derail the global economy," said the report. An escalation in trade disputes will lead to uncertainty around company investment decisions, will moderate global trade flows and will also likely lead to shifts in supply chains, said Moody's.
Technology and innovation was the fifth theme, with advances in digital technologies likely to lead to improvements in productivity, but also disruption as firms work to keep pace with these changes. Cyber and data privacy risks also add to operational and reputational considerations for governments and industry.
And linked to that was the sixth theme: environmental, social and governance risk. Moody's said carbon transition risk likely will materially influence credit in 2019, while the rise in income inequality — in particular in the U.S. — "could ratchet up political polarization and lead to sudden policy shifts on hot-button issues such as immigration," said the report.
"The slowdown in economic growth will give way to even weaker global credit conditions in 2020, while the multitude of risks on the horizon are increasing both in number and severity," said Elena Duggar, a Moody's associate managing director and author of the report, in a statement accompanying the report.
The agency expects growth across Group of 20 countries to slow to about 2.9% in 2019, down from a forecast 3.3% in 2018 and the same in 2017.
The report is available for download from the Moody's website.