PHILIP PILKINGTON
The European statistics agency Eurostat has released its bank lending survey and the data does not look good. The survey tracks the credit conditions and amount of loan demand seen in the European banking system: as it is based on a survey of lenders, it is typically seen as a “forward-looking” indicator. That is, it picks up on trends before they emerge in the official data.
The release makes for grim reading. Credit supply across the board is tight, with banks reluctant to lend in the face of rising interest rates. Credit demand is poor, too, with Europeans reluctant to take out bank loans. But it is in the commercial sector that the picture looks particularly concerning: demand for loans among businesses is now at historic lows.
“Euro area firms’ net demand for loans decreased strongly in the second quarter of 2023,” the authors write, “dropping to an all-time low since the start of the survey in 2003.” This means that commercial loan demand is now lower than it was in the depths of the credit crunch of 2008-09, particularly worrying since high energy prices are currently putting pressure on European firms. This data is wholly consistent with the idea that Europe might be undergoing a profound deindustrialisation.
This may just be survey data, but it correlates clearly with the hard data typically released later by statistics agencies, enabling forecasts of future developments. The chart below shows the “soft” lending data together with the “hard” data of European fixed investment. It is not hard to see that the two are strongly correlated.
Looking at the forecast for European fixed investment, it implies that investment has fallen in Europe by around the same amount as in the recession of 2008-09. Since the business cycle is led by fixed capital investment, this data can also be used to forecast GDP growth in Europe. The chart below lays out GDP growth in Europe since 2003 together with this forecast.
The bank lending data implies that European economies are now deep in recession. It also suggests that this recession is even more violent than that of 2008-09. While the financial crisis started slowly before becoming gradually more severe, this forecast indicates that the present recession might start violently and then — well, who knows?
That said, there are other indications that Europe is not undergoing a recession. The unemployment rate, for example, is currently very low whereas in 2008-09, the last time bank lending survey numbers were so dire, it was rising rapidly. This leaves one of two possibilities. The first is that the lending data is contracting so rapidly that it is even more of a leading indicator than usual, implying that a very large recession is on the horizon in Europe, and it is only the bank lending survey data that is detecting it.
The other possibility is that this time is different, that the bank lending survey data no longer works to predict GDP growth. This would mean that something has gone seriously wrong in the commercial lending sector. On this reading, companies are contracting their lending as if the economy were in a major recession, all while the economy is still growing. The most obvious explanation here would be high energy prices.
It is not clear which of these alternatives is worse. But either way, the bank lending survey data demonstrates that the European economy is in a very tough spot.
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