Glimmers of hope in the euro area

Given the persistent weakness in credit growth across the Eurozone (see discussion), the latest quarterly ECB survey of banks brought some welcome news. It seems that demand for loans is declining slower than in Q1 and credit tightening in the euro area is subsiding.

Loan demand of course is still in bad shape and is undergoing a sharp decline, but the survey shows a slowdown in the rate of contraction. More importantly banks seem to think that loan demand should stop declining or even start improving in the third quarter. Of course these expectations have been consistently wrong in the past, but at least the trend is positive.

Source: ECB

The tightening of lending standards is moving in the right direction as well, and banks expect improvements going forward.

Source: ECB

Separately, though potentially related to signs of thaw in credit conditions, the Eurozone Markit PMI also showed improvement.

Source: Markit

Given the prolonged economic weakness in the area, it was good to finally see an upbeat report from Markit.

Chris Williamson, Chief Economist, Markit: - The best PMI reading for one-and-a-half years provides encouraging evidence to suggest that the euro area could – at long last – pull out of its recession in the third quarter.

The revival is being led by a broad-based upturn in manufacturing, where growth surged to a two-year high. Increased goods production was reported in Germany, France and across the rest of the region as a whole.

There are also promising signs of stabilisation in the service sector, which hints at some much– needed upturns in domestic demand. Rising service sector activity in Germany is being accompanied by slower rates of decline in France and elsewhere across the region.

Going forward, the biggest challenge for the area, in addition to stabilizing credit growth, will be to halt the relentless rise in unemployment. Labor laws have to undergo reforms in a number of countries and competitiveness has to improve. Without progress on the jobs front, recovery from the current recession is unlikely to be sustainable.

SoberLook.com

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