Economic recessions and credit market stress

by MonetaryCommentary

When credit spreads surge and GDP contracts, the common interpretation is causality, though what’s more revealing is how the credit market prices risk before the economy acknowledges it.

In pre-GFC regimes, the widening of corporate bond spreads was tightly coupled with funding cost pressures and a hard pullback in credit availability. But, post-2008, the response became more fragmented. Credit spreads still reacted violently, but the translation into GDP has been smoothed by policy reflexes: swap lines, backstops fiscal patchwork, etc.

What my chart exposes is the asymmetry in response: financial stress is immediate, real contraction is delayed. And the deeper the divergence between widening spreads and shallow GDP drawdowns, the clearer the footprint of institutional shock absorption. Recessions haven’t become less painful — they’ve become more controlled burns, with financial conditions doing the signaling, and GDP lagging behind. That delay isn’t just a lag — it’s the cost of engineered stability.

(Note: I failed to mention in the chart that the right axis represents GDP, while the left one represents OAS)