Is growth in euro zone bank lending to companies fizzling out?

January 29, 2016

The European Central Bank (ECB) President Mario Draghi addresses a news conference at the ECB headquarters in Frankfurt, Germany, January 21, 2016. The ECB held interest rates at record lows on Thursday, but the market crash, tumbling bank stocks and ebbing inflation may set the stage for action later in the year.   REUTERS/Kai Pfaffenbach - RTX23E79

A meaningful economic revival in the euro zone that has any hope of generating inflation pressures of its own rests mainly on a pickup in demand.

If the latest private lending figures published by the European Central Bank are any gauge of that, there is plenty of reason to worry there still isn’t enough of it.

ECB President Mario Draghi has pointed to the recent pickup in lending as a sign that the central bank’s increasingly aggressive monetary policy – a negative deposit rate and 60 billion euros of mainly government bond purchases each month – is working.

But in the sixth month of growth after a roughly three-year period of contraction, that revival in private lending appears to be running out of steam.

Euro zone private lending -Dec

Lending to households appears to be doing better, driven by cheap mortgage lending, although there’s been no major acceleration over the past few months either.

Analysts at Citi wrote:

The credit picture is improving gradually, in our view, with more lending to households evident in December. Yet, a sharp net outflow on the non-financial corporate segment, meaning close to zero for net lending to firms in 4Q-15, asks the question whether the improvement in net lending could be losing some momentum. We suspect that the ECB will take this into consideration when re-assessing its monetary policy stance in March.

It may be that the sudden slowdown in lending to non-financial corporations is just a blip. But solid revivals generally have their own momentum once they get started. And this latest setback happened before all of the turmoil in financial markets that barely anyone was expecting.

Graphics by Vincent Flasseur

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