In its Credit Conditions Europe Q3 2026, S&P Global Ratings called European credit conditions “resilient” but warned that the macro outlook remains weak. Eurozone growth was revised downwards by 0.5 percentage points to +0.5% for 2026, with prospects of substantial stagnation in the second half of the year. Inflation is expected to peak at around 4% in the third quarter, and then return to the target only at the beginning of 2028. In this context, S&P expects a further ECB hike in September, after that of June: “Forecasts of higher inflation and weaker growth do not materially change our baseline scenario on monetary policy”. Brent is expected to average $110 a barrel for the rest of 2026 in the base case, versus $80 in the previous scenario in March, reflecting the fragility of the US-Iran deal on the Strait of Hormuz.
Two alternative scenarios on the Middle East
The agency has developed two alternative scenarios. In the severe scenario, a new peak in energy prices and deteriorating financial conditions would push the main European economies – Germany, France and Italy – into recession in 2026, with inflation 70 basis points higher than the baseline scenario and bond yields rising by around 50 basis points. In the most favorable scenario, a more rapid normalization of energy flows would support growth by around 0.25-0.30 percentage points and reduce the need for further increases by the ECB and the Bank of England.
Corporate and bank credit: sector divergence
Rating actions remain in line with credit fundamentals. European banks show capital strength and stable profitability prospects, with several institutions targeting RoTEs above 20% by 2028; S&P expects only a moderate increase in credit costs. Among corporates, the sectoral divergence is marked: aerospace and defense benefit from solid order books, while auto and chemicals record the highest negative biases – at 50% and 24% respectively on issuers in the auto sector – due to Chinese competition and US tariffs. The European default rate is expected to rise to 3.75% by March 2027 from the current 3.2%.
Three structural risks
S&P identifies three key risks: the fragility of the US-Iran deal, with the risk that energy flows will not normalize quickly; escalating EU-China trade tensions in strategic sectors such as electric vehicles, batteries and chemicals; and the emergence of AI frontier models as a new vector of cyber risk, with systemic implications for banks and corporations. The latter risk is exemplified by the emergence of the Mythos model, which has accelerated the need for a “rethinking of the assumptions underlying threat management in many organizations.”
