Defaults, delinquencies poised to rise for rate-sensitive borrowers.

With the economy slowing and rate cuts still in the distance, U.S. credit conditions are expected to deteriorate in the second half, says Fitch Ratings in a new report.

The rating agency noted it is expecting a weaker credit environment for the balance of the year as growth slows and labour market conditions soften.

Fitch is forecasting annual growth to slow to 2.1% for the full year, down from 2.5% last year.

“Consumer spending growth has been holding up well and will likely be tempered as nominal wage and job growth slows,” it said.

Against this backdrop, Fitch is expecting a “soft landing” for the U.S. economy, with the U.S. Federal Reserve Board starting to cut rates in September and again in December.

“Delinquencies and defaults will continue to rise in the second half for rate-sensitive borrowers, including commercial mortgage-backed securities, high-yield/leveraged loan, and subprime consumers,” it said.

Specifically, Fitch is projecting higher delinquencies across all major commercial real estate sectors in the second half.

It also raised its default rate forecasts for leveraged loan issuers to between 5.0% and 5.5% for 2024, “as high interest rates are pressuring highly levered issuers’ liquidity positions and ability to service debt.”

High-yield defaults are also expected to range between 5.0% and 5.5% for the year.

Despite the expected increase in defaults, Fitch said its credit rating outlooks for North American sectors “are split fairly evenly between neutral and deteriorating.”