UBS expects global growth to slow in the second half. Here's why

UBS analysts predict European private credit spreads will remain rangebound despite expectations of slowing global growth and potential headwinds from tariffs. The analysts cite healthy corporate balance sheets, low defaults, and significant dry powder in the European private credit market as supportive factors, while noting that recent international trade court rulings introduce complexities that reduce the risk of swift implementation of U.S. tariffs. Investment-grade debt from financial firms are seen as being in a "sweet spot", while investment-grade energy and high-yield basic resources have been the most sensitive sectors to tariff headlines.

Analysis

UBS analysts project European private credit spreads will likely remain rangebound through the latter half of the year, despite an anticipated gradual slowdown in global growth. This outlook is underpinned by several factors within the European private credit market, including healthy corporate balance sheets, low default rates, solid "technicals," and substantial "dry powder" available to support liquidity and mitigate hard defaults. While broader economic concerns persist, with the Organisation for Economic Co-operation and Development (OECD) revising its 2025 global GDP growth forecast downwards to 2.9% from a prior estimate of 3.1% citing potential tariff impacts, UBS notes that recent "upside surprises" in U.S. and EU economic data, possibly inflated by front-loaded exports ahead of tariff impositions, could fade later in 2025. Crucially, the analysts highlight that international trade court rulings are introducing "legal complexities and delays," diminishing the immediate risk of swift implementation of heightened U.S. tariffs on the European Union. Should Europe successfully avoid these elevated levies, UBS predicts regional private credit spreads could "probably test their year-to-date tights," although their baseline scenario remains rangebound. Within this environment, investment-grade debt from financial firms is identified as being in a "sweet spot," benefiting from a perceived "absence of widespread systemic risks." Conversely, investment-grade energy and high-yield basic resources have demonstrated the highest sensitivity to tariff-related headlines, while capital goods and utilities have shown relative outperformance. UBS recommends a long position in the iTraxx Europe Main index against European investment-grade debt, and flags July as a period of potential heightened volatility as a pause on U.S. "reciprocal" tariffs is set to expire.

Key Decisions for Investors

• Consider maintaining exposure to European private credit, particularly given its underlying strong fundamentals and the potential for spreads to remain rangebound or even tighten if significant tariff escalations are avoided.
• Monitor tariff developments closely, as investment-grade energy and high-yield basic resources sectors are highly sensitive to such news, while investment-grade financials may offer relative resilience.
• Prepare for potential increased market volatility around July due to expiring tariff pauses, and evaluate tactical opportunities such as going long the iTraxx Europe Main index versus European investment-grade debt, as suggested by UBS.