Hesitancy among German banks has reached a seven-year high, according to findings from the IFO Institute. This growing reticence is affecting the ability of German businesses to secure necessary funding.
The latest report from the Munich-based think tank reveals that their Credit Constraint Indicator, which assesses the availability of bank loans to firms, has surged to its highest level since 2016.
Notably, 32.9% of approximately 2,000 businesses surveyed reported restrictive lending practices from banks in September, an increase from 27.1% in June. This trend signals a tightening credit market that could hinder economic growth.
When we delve deeper into specific sectors, the data shows a significant uptick in credit constraints among service providers, rising from 27.0% to 35.7%, and in the industrial sector, which increased from 26.2% to 34.3%.
Professor Klaus Wohlrabe, a senior economist at the IFO, commented on the situation, stating, “A lack of orders across various sectors is prompting banks to conduct more stringent credit assessments. Given the current investment hesitancy within German companies, easing access to loans would be beneficial.”
Interestingly, some industries did experience a decrease in difficulties securing funding. For instance, the indicator for construction dipped from 32.2% to 20.7%, while wholesale businesses saw a slight decline from 24.6% to 23.2%, and retail recovered from 30.0% to 27.0%.
The Potential for ECB Rate Cuts
Commenting on the broader implications, Benjamin Born, a macroeconomics professor at the Frankfurt School of Finance & Management, expressed that “the German economy has been mired in a prolonged slump for over a year.” This ongoing uncertainty regarding short- and long-term business strategies is creating a challenging cycle where firms are reluctant to invest, subsequently causing banks to become more cautious in their lending decisions.
However, there remains a glimmer of hope. Economists anticipate that the European Central Bank (ECB) may proceed with further monetary easing at its upcoming meeting, which could improve financial conditions for businesses trying to navigate this turbulent landscape.
A tight lending environment can severely limit business investment and job creation, thereby hampering overall economic stability. Should the ECB opt for interest rate cuts, it could lead to more affordable loans for firms, stimulating economic activity and creating a conducive atmosphere for lending.
The Risks of Lending in Today’s Economy
Recently, Germany’s economy minister, Robert Habeck, indicated an expected GDP contraction of 0.2% for the year, marking the second consecutive annual decline. This downturn can be attributed to factors such as surging energy prices across Europe and a sluggish Chinese economy, alongside more persistent structural issues.
Challenges like inadequate infrastructure, an aging population, and excessive bureaucratic hurdles are equally concerning.
“In the current economic context, it’s understandable to see banks tightening credit supply to companies in Germany,” noted Matthias Meier, an Assistant Professor of Economics at the University of Mannheim. He elaborated on how the absence of stabilization policies during economic downturns can lead to higher corporate defaults, further straining banks and their willingness to lend.
Moreover, increasing debt refinancing can exacerbate lending risks, as firms become more exposed to rising repayment costs on existing loans. As Meier explained, “The significant amount of long-term debt accrued during a period of historically low interest rates is now maturing in a climate of significantly higher rates.”
Photo credit & article inspired by: Euronews
