Scope Ratings says in its Corporates Outlook 2024 published today that this pressure is likely to persist even with the gradual economic upturn likely in the second half of the year.

“European companies face a year of transition as many are still coping with the lingering impact of last year’s perfect storm of high interest rates, high inflation, sluggish economic growth and mounting geopolitical tensions,” says Olaf Tölke, head of corporate research at Scope.

“Stable credit quality predominantly for investment-grade issuers contrast with a deteriorating trend in some sectors and for non-investment-grade companies. We expect a higher number of defaults overall compared with 2023,” Tölke says.

The credit prospects for the 11 sectors that Scope has covered in this year’s corporate outlook pan out as follows:

• Stable: automotive, construction, pharmaceuticals, retail, telecommunication services
• Positive: oil & gas, utilities
• Negative: real estate, consumer products, chemicals, business services

European corporates outlook for 2024 for 11 core sectors, with direction of key trends

Source: Scope Ratings

Inventory overhang clouds chemicals sector outlook amid high energy costs, weak growth

Among the multiple trends across the sectors, one of the most important is weak demand for industrial goods, notably chemicals, as customers only slowly replenish stock that they had built up during pandemic and were able to run down in the immediate aftermath.

Overall economic growth also remains sluggish. “We expect a gradual upturn in economic activity from the middle of 2024 as the global economy heads for a soft landing this year: 1.1% GDP growth in the euro area, 2.2% in the US and 4.4% in China,” says Tölke. See Scope’s Sovereign Outlook 2024 for more detailed forecasts. Consumer and industrial confidence indicators – while having gradually improved lately – are still well below long-term averages.

“The prevailing combination of inflation – energy prices remain elevated, wages are rising – and significantly increased funding costs remain a drag on corporate performance particularly in some parts of Europe such as in Germany,” says Tölke.

While inflation has come down from its peaks over recent quarters, a return to significantly lower levels will take time and remains vulnerable to further supply-side shocks.

Financing conditions remain tight particularly for non-IG companies

“Funding costs have risen significantly in 2023 and now are likely to remain about twice as high as before monetary tightening began in the aftermath of the pandemic. Access to refinancing has become significantly restricted, especially for companies without investment grade (IG) credit ratings, mirroring banks’ greater reluctance to extend credit, with alternative lenders unlikely to fully plug the gap,” says Tölke. The problem is particularly acute for much of the real estate sector.

Refinancing requirements are high. European-based issuers’ bond refinancing volumes are running at about EUR 500bn a year in 2025 and 2026, significantly higher than the 2019-2022 average.

Corporate capital expenditure is likely to stabilise this year compared with 2023 considering the continued squeeze on cash flow particularly for companies unable to translate higher operating and funding costs into higher selling prices. Levels of working capital should also remain stable. Pressure on cash flow will also constrain any increase in discretionary spending on shareholder remuneration and mergers and acquisitions.

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