Global credit risks are on the rise amid rising interest rates, the European energy crisis, and China’s troubled property market, among other threats, says Fitch Ratings.

Despite downgrading its economic forecasts to anticipate recessions in the U.S. and Europe next year, global credit risks remain tilted to downside, Fitch said in a new report, adding the realization of these downside risks threaten deeper, longer recessions, and tougher credit consequences.

“Core risks that would materially heighten credit risks include the failure of the European gas market to balance, sustained high inflation in the U.S. and Europe through 2023, the Chinese property market and the extent to which a lack of recovery may spread risks to other sectors, the progression of the Russia-Ukraine war, the pace of housing market corrections in developed markets, and policy missteps as authorities react to economic and social pressures,” it said.

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Given the accumulating economic challenges, Fitch projects that the U.S. high yield default rate will rise.

It currently forecasts that the default rate will finish at 2.5%-3.5% at the end of 2023, and will sit at 3% to 4% in 2024.

So far this year, the high yield default rate is 1.2%, which is expected to rise to 1.5%-1.75% by the end of the year.

The rating agency expects approximately 30 defaults in 2023, up from 13 so far this year and 11 in 2021.

However, this would still be below the 55 defaults averaged during the 2017-2020 period, which was marked by frequent defaults in the energy sector.

Additionally, Fitch noted that its forecast remains below the historic average of 3.8%, and below the 5.2% rate recorded in 2020.

“The 2023 anticipated default rate equates to roughly $40 billion of volume, in line with the amount tallied in 2019 but less than the 2016 and 2020 figures and well below the $113 billion registered in 2009,” said Eric Rosenthal, senior director at Fitch, in a release.

Fitch said that defaults in 2023 will be concentrated in retail, telecom and broadcasting/media sectors. In 2024, the tech and healthcare/pharmaceutical sectors are likely to lead the default activity, it said.