Inflation and interest rates remain the most significant watch item for global credit, Fitch Ratings has disclosed in its latest Risk Headquarters report.

According to the rating agency, core inflation remains sticky and well above central bank targets despite headline disinflation gaining pace in the US and eurozone in 2Q23.

“The underlying macro picture for global credit has improved since the beginning of the year, although tighter lending conditions and hawkish central bank policy underscores the outlook for a cyclical deceleration”, it explained..

According to Fitch’s base-case forecasts, this will include a shallow recession in the US, limited growth in the eurozone and building risks to China’s recovery.

“As such, our Key Risks for global credit – those that could have the most impact on our rated portfolio over the coming two years – remain largely unchanged. These risks include negative scenarios for funding, asset valuations and financial stability; inflation and interest rates; and geopolitics, governance and policy”, it added.

Included in these risks is a focus on commercial real estate (CRE) and rising challenges to China’s post-Covid recovery.

For the latter, it said, second quarter 2023 property data showing a marked contraction in sales and continued pressures facing developers highlight the risks to a steady re-acceleration in Chinese growth.

“US CRE continued to show signs of pressure with several large US mortgage REITs reducing new lending and weaker results from US large and regional banks in second quarter 2023”, it mentioned.

The main long-term and emergent risks are also unchanged, saying, it is focusing on climate change, demographic challenges, cyber-conflict and the rapid roll-out of AI as a technological disrupter.