In the face of rapid rate hikes and tightening credit access, Eurozone demand for loans among firms has plummeted to an unprecedented low. According to a recent survey by the European Central Bank (ECB), big banks reported a substantial drop in net demand for loans during the second quarter of 2023, marking the lowest level since the survey’s inception in 2003. The findings further reinforce concerns over the bloc’s struggling economy and are likely to shape the ECB’s upcoming policy decisions.
Eurozone Demand for Loans Crashed in Q2
According to the ECB survey, “Banks reported a strong net decrease in demand from firms for loans or drawing of credit lines in the second quarter of 2023, which dropped to an all-time low since the start of the survey in 2003. The net decrease was again substantially stronger than expected by banks in the previous quarter. Rising interest rates and lower financing needs for fixed investment were the main drivers of reduced loan demand.”
Eurozone Demand for Mortgages Declines
The demand for mortgages also witnessed a sharp decline, though not as severe as seen in the previous two quarters. Nevertheless, the ECB predicts a further moderate drop in demand during the third quarter. The tightening credit environment and increased perception of refinancing and repayment risks have been major contributing factors.
Tightened Credit Standards
The survey revealed that while the percentage of banks reporting tighter credit standards decreased compared to the previous quarter, it remained higher than the historical average. The ongoing tightening of credit standards is expected to continue into the current quarter, exacerbating the challenges faced by businesses and consumers seeking access to credit.
Impact on Economic Growth
The ECB has implemented multiple rate hikes, totaling a combined 4 percentage points over the past year, in an effort to manage inflation without pushing the euro zone into a recession. The strategy has shown some success, with inflation rates beginning to recede despite a tight labor market. However, economic growth turned negative at the turn of the year, and the full effects of the rate increases are yet to be realized in the broader economy. It comes as the latest monetary developments already pointed to a gloomy outlook for the coming months suggesting that the Bloomberg consensus of economists looks too optimistic for 2023 (+0.5%) and 2024 (+1.0%) GDP. As a reminder, last week, the Bundesbank warned the outlook remains grim compared to their previous estimate of a 0.3% contraction this year.
The euro zone’s record-low demand for loans, as highlighted by the ECB’s survey, underscores the growing challenges facing the bloc’s economy amid rapid rate hikes and tightened credit access. The central bank’s upcoming policy decisions will be closely watched as they seek to strike the right balance between controlling inflation and nurturing economic recovery in these uncertain times.
