What indicates a potential increase in credit risk?

A potential increase in credit risk is indicated by low economic growth. When economic growth is weak or stagnant, businesses may experience reduced sales and profits, which can lead to difficulties in meeting debt obligations. As borrowers face heightened challenges in generating revenue, their likelihood of default on loans or bonds increases. This elevated risk can affect the overall credit quality of loans and securities issued to those borrowers.

In contrast, high interest rates typically correlate with tighter credit conditions but do not inherently signify increased credit risk in borrowers. Stable market conditions usually suggest that there is less uncertainty and volatility, which is generally favorable for credit risk. Increased corporate earnings typically strengthen a company's financial position, reducing credit risk as businesses are better positioned to repay their debts. Thus, low economic growth is the most direct indicator of potential credit risk.