Euro zone lending growth slows further as rate hikes bite
The growth in lending to euro zone companies slowed in July due to higher interest rates, signaling a potential brake on credit creation and economic growth.
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Posted 8/28/2023, 8:55:00 AM
reuters.com
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The Eurozone and UK services PMI data led to a drop in the euro and pound, while weakness was observed in Canadian consumers and China, suggesting a darkening global growth picture as interest rates rise, with the US being the main source of growth but showing signs of slowing in mortgage applications and student debt repayments.
The European Central Bank (ECB) faces a complex decision on whether to continue raising interest rates in September as eurozone businesses experience declines in outputs and new orders, with some experts suggesting a pause in rate hikes to ease pressure on the economy.
The contraction in euro area business activity has intensified, particularly in Germany, leading to expectations that the European Central Bank will pause its interest-rate hike campaign; US mortgage applications for home purchases have hit a three-decade low due to rising borrowing costs; South Korea's exports continue to decline, indicating lackluster global trade; Turkey's interest-rate increase has triggered a rally in the country's assets; shrinking water levels at the Panama Canal due to climate change may cause delays in restocking inventories before Christmas.
The decline in euro zone business activity accelerated faster than expected last month, with the services industry falling into contraction, raising concerns of a possible recession.
HSBC economists predict that higher borrowing costs will lead to a decline of more than 1% in the euro zone's GDP by 2025, potentially causing a recession, although the British economy is expected to be less affected due to government-backed loans and healthy balance sheets.
Private debt fundraising and deals in Europe are slowing down, indicating that aggressive interest rate rises may be causing funding stress and exacerbating economic pain. The European private credit industry has seen a 34% drop in new investment compared to the same period last year, and direct lenders are closing fewer transactions, leading to concerns about defaults and tighter liquidity in the future.
Consumer credit growth slows in July, with overall credit rising $10.4 billion, below expectations, as revolving credit rebounds while nonrevolving credit growth remains modest, indicating potential exhaustion of excess savings from the pandemic.
The euro zone's economy is expected to grow slower than previously forecasted due to high inflation and Germany slipping into recession, according to the European Commission.
Credit union customers experienced loan balance growth in the second quarter of 2023, with credit unions being the only lender category to show growth across the board; however, new credit slowed in all categories except for personal loans.
The euro zone economy is expected to contract this quarter and remain in recession as the impact of central banks' interest rate rises hampers growth, according to a survey by HCOB's flash euro zone Composite Purchasing Managers' Index (PMI), with Germany and France experiencing significant declines in business activity.
The Bank of England has decided to halt interest rate rises due to unexpected inflation slowdown, while housing markets in major global economies, including the US, Germany, and the UK, are showing signs of slowing down. Additionally, there have been developments in various countries' economic outlooks and key interest rates.