Eurozone bank lending set for rare decline

Banks in the Eurozone are anticipated to reduce lending in 2019 for the first time since 2014 as the region as a whole enters a recession. According to a recently released report, banks will restrict their lending in the face of rising interest rates and erratic economic conditions, making it more difficult for cash-strapped businesses to borrow. According to EY, bank lending will decrease by 1.8% in the eurozone next year after increasing by 4.6% this year.

In addition, the analysis predicted that consumers’ demand for loans would decline as a result of rising energy costs, interest rates, and inflation, together with declining real household earnings. “The region’s economies are facing recession, and a contraction in borrowing driven by reduced demand and supply is forecast as consumers, businesses and banks become more cautious,” said expert Omar Ali.

“The short-term economic impact will be felt universally, but small businesses are likely to struggle most if access to finance is constrained.”

Nevertheless, the forecast remains that lending in the eurozone will increase after next year, reaching 2.7% in 2024 and 3.7% in 2025, presuming the conflict in Ukraine does not worsen, inflation declines, energy costs stabilise, and confidence grows.

As businesses struggle with higher borrowing rates, subdued economic growth, supply chain issues, and the rising cost of capital goods, lending to businesses is predicted to fall 2.7% next year, to its lowest level in ten years. Given that consumers are less likely to purchase expensive goods due to the impact of inflation on incomes, it is anticipated that consumer borrowing will decline by 1.4% in 2023.

As businesses and people struggle to make their debt payments, experts in the referred report forecasted that banks will be slammed with a 2.6% increase in loan losses this year, increasing to 5% in 2025. But because banks tightened their lending standards during the financial crisis, the rates will be lower than during previous economic downturns. Loan losses in the eurozone reached an all-time high of 8.4% in 2013.

As a result of the negative economic effects of increasing energy prices, Germany and Italy are predicted to experience the largest declines in lending next year, at 1.7% and 1.8%, respectively. Colm Kelleher, chair of UBS, stated recently that Brexit and the failure of the EU’s banking union programme meant lending was likely to fall dramatically in a recession. He predicted that Europe would be a relatively barren continent in the future.

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