Wednesday, August 28, 2013

Credit growth remains the weakest link in Eurozone's recovery

In spite of some positive economic signals out of the Eurozone (see Twitter chart), the area continues to struggle with credit growth. The latest loan growth measures still look quite bleak. We may however be seeing the first signs of the bottoming out of consumer credit, although the "improvements" are by no means compelling.

YoY loan growth to householdsadjusted for sales and securitizations
(source: ECB) 

This slight increase in consumer credit (above) is mostly due to lower declines in credit card and auto debt, as the euro area consumer is still deleveraging but at a slower rate.

YoY consumption loan growth to individuals (source: ECB)

Growth in the Eurozone mortgage loans however continues to weaken.

YoY loan loans for house purchase (source: ECB)

Not surprisingly a great deal of this weakness in mortgages is generated by Spain (chart below) and Italy to some extent. The collapse in mortgage growth from the peak of 27% per year during the pre-financial crisis years demonstrates the massive housing bubble that Spain is still unwinding.

YoY loans for house purchase in Spain (source: ECB)
Different time scale from the chart above

In contrast to household credit, which may have on aggregate bottomed out in June, corporate loan declines in the Eurozone have actually accelerated, generating a 1.4% total credit contraction in the area.

YoY loan growth to corporations adjusted for sales and securitizations
(source: ECB) 
The explanation for this trend is quite clear:
Reuters: - With much of the euro zone periphery still in recession, investment and spending is subdued, while banks are restraining lending to repair their balance sheets - a combination that risks condemning the bloc to an anemic and uneven recovery.

Adjusted for sales and securitization, the drop in loans to the private sector was 1.4 percent on an annual basis, the biggest on the record.

An ECB survey released in July showed that euro zone banks, facing tougher capital requirements, tightened lending standards for both companies and home loans in the second quarter even though their access to funding eased.
With credit still contracting, it was not unexpected to see growth in the area's broad money supply (M3) stalling. The ECB's extraordinary support for the banking system and low interest rates have not achieved the sufficient "monetary transmission" to stimulate lending.

Source: Econoday

None of this has been much of a surprise to economists, given the area's pressured banking system, weak corporate loan demand, and a relentless real estate-driven credit contraction in Spain. In spite of some recent progress (see Twitter chart on consumer confidence), it's going to be a tough and uneven road to recovery.
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