Marked Decline in Loan Demand in Eurozone in First Quarter

May 20, 2023, 2022 (EIRNS)—The first quarterly issue of the European Central Bank Economic Bulletin, published May 18, reported a collapse of credit to firms and households in the first quarter of 2023. “The decline in loan demand from firms was the strongest since the global financial crisis, while that of households was the largest since the start of the survey in 2003,” the bulletin says.

“The decline in loan demand from firms and households was stronger than expected by banks in the previous quarter. Banks reported that the general level of interest rates was the main driver of reduced loan demand, in an environment of monetary policy tightening. Falling financing needs for fixed investment also had a strong dampening effect on loan demand from firms. The decrease in the demand for housing loans remained strong and was mainly driven by rising interest rates, weakening housing market prospects and low consumer confidence....

“The annual growth rate of loans to [non-financial corporations] NFCs declined to 5.2% in March, from 5.7% in February. This slowdown was widespread across the largest economies and reflects the higher interest rates, the strong decrease in loan demand and the further substantial tightening of credit standards. The annual growth rate of loans to households also continued to moderate, edging down from 3.2% in February to 2.9% in March amid deteriorating housing market prospects, a substantial further tightening of banks’ credit standards and higher lending rates. It was mainly driven by the ongoing decline in the growth of housing loans, but since the beginning of 2023 other loans to households, and in particular those granted to sole proprietors (i.e. unincorporated small businesses), have shown substantial negative net flows and therefore also contributed to the weakening.”

Despite the disaster, the ECB will continue to raise interest rates, the bulletin says, and banks expect therefore a further decline in credit in the second quarter.