Euro-zone private loans growth in record low

Loans to euro-zone businesses and households grew at the slowest annual pace on record in June, European Central Bank data showed yesterday, with weak demand from firms and households eating into growth.

Annual loan growth to the private sector slowed to 1.5 per cent in June from 1.8 per cent in May and was at the lowest level since data series began in 1992, and slightly below the 1.6 per cent rate expected by economists in a Reuters poll.

Loans to non-financial corporations grew at a 2.8 per cent annual rate, down from 4.4 per cent in May. Month-on-month, these loans fell by €35 billion (Dh183.36bn), or about 0.7 per cent, the biggest decrease since at least 2003, showed ECB data.

"The figure is quite spectacular for new credit to the corporate sector, €35bn," said Deutsche Bank economist Gilles Moec. "We have seen negative flows previously but with these figures we are in a different universe." The drop was strongest in loans for a duration under one year.

Most economists said the weak lending figures were more likely reflect subdued demand rather than a credit crunch. "We continue to think that the slowdown in the economy is the most important factor currently contributing to the weakness in bank lending," said Fortis economist Nick Kounis.

"The sharp contraction in capital spending – reflecting the deteriorating economic outlook and the slump in profitability – have probably also led to fall in demand for bank loans." Analysts said they were looking forward to the next ECB bank lending survey, scheduled to be released tomorrow, to get more information about credit standards and demand.

Annual growth of M3 money supply – a broad measure of money available to spend – slowed to 3.5 per cent in June from 3.7 per cent in May.

The ECB has set a reference rate of 4.5 per cent for the three-month moving average of annual money supply growth, above which the bank sees dangers to medium-term price stability.

Narrower money indicator M1 – immediately accessible funds – grew at an annual pace of 9.3 per cent in June, up from 7.9 per cent in May and the fastest annual growth rate since May 2006 and adding to hopes that the worst of the recession is past.

"Month-to-month, the M3 figure is quite good, and M1, which is often considered a better leading indicator, is even better," said Barclays Capital economist Julian Callow.

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