S&P Expects US Corporate Default Rate to More Than Double in Shallow Recession

S&P Global Ratings has warned that the default rate for US companies could soar to 3.75% if the Federal Reserve's efforts to fight inflation only lead to a shallow recession. If the downturn is more severe, the default rate could reach 6%.

S&P analysts expect that higher interest rates and consumer prices will cause 69 speculative-grade companies to fall behind on debt servicing by September 2023. This would more than double the default rate from 1.6% a year earlier, and would be the highest default rate since June 2021. This would surpass the 10-year average of 3.1%.

The pessimist’s case is still a risk, with 6% of high-yield corporate issuers potentially defaulting if a deeper or longer recession occurs. This is the highest rate since March 2021, and well above the long-term average of 4.1%.

S&P analysts believe that the severity of a potential recession will have a significant impact on the economy, and whether or not the Federal Reserve will continue to raise interest rates. If a recession does occur, they expect that businesses will have to use their cash reserves to weather the storm, as consumption is likely to decrease.

Many on Wall Street are trying to answer the question of how high interest rates will go as Fed officials reiterate their plans to send them higher. However, S&P believes that the third-quarter rebound in the US economy, following two quarters of contraction, was more of a "last hurrah" than a clear indication of what lies ahead.