European economic watch
At the latest meeting the European Central Bank (ECB), once again confirmed that monetary growth was "very vigorous" and lending to non-financial corporations was "very robust". This implies that, unlike in the UK, where certain parts of the household...
At the latest meeting the European Central Bank (ECB), once again confirmed that monetary growth was "very vigorous" and lending to non-financial corporations was "very robust". This implies that, unlike in the UK, where certain parts of the household sector no longer have access to credit, the supply of loans in the eurozone has not yet been curtailed in any significant way. Similarly, according to the ECB's latest bank lending survey, banks say they are tightening lending standards but, as yet, the rise in the price of credit does not appear to have gone much beyond what might have been expected based on past increases in the policy rate. Indeed, based on March data, the average interest rate on new housing loans was little more than 20 basis points higher than at the end of June 2007 while the interest rate on new loans to the non-financial corporate sector were only 30 basis points higher.
However, aggregate data for the eurozone mask some very large differences between countries. Clearly there are parts of the eurozone, notably Spain and Ireland, where there are a lot of similarities with the housing market and household borrowing issues evident in the US.
Different countries in the eurozone have had varying degrees of reliance on covered bond issuance and securitisation as a means of financing new lending to households in recent years. German banks have not been reliant on securitisation and are not increasing their central bank borrowing significantly. Hence, German banks' interest rates on new corporate loans in March were less than 25 basis points higher than before the beginning of the turmoil last summer
The apparently less acute funding needs of the German banks mean interest rates have barely moved since last summer and new corporate loan growth is strong. In contrast, competition for deposits and a greater sensitivity to variable rates have pushed up deposit and lending rates in France, Italy and Spain, among others.
It is notable that the flow of new corporate loans in France and Spain has been nowhere near as strong as in Germany, which may partly reflect the difference in the price of loans. But even in Germany banks say they are tightening lending standards, although to a lesser extent than in, for instance, France. So why has this not been reflected in credit growth? There is the possibility that factors such as the reduction in bond issuance and firms using un-drawn credit lines may be playing in boosting eurozone loan growth.
Looking forward we continue to expect to see the tightening of lending standards reflected in slower corporate loan growth as banks become increasingly reluctant to provide SMEs, in particular, with credit in the same quantities or on the same attractive terms as previously. While household sector loan growth has gradually slowed over the past two years across the eurozone, the corporate sector has become increasingly dependent on loans. The eurozone corporate sector runs a financial deficit and although this is a textbook economy (whereby the household sector saves to provide funds for productive investment by the corporate sector) it is not such a favourable place to be when the price of credit is rising and the threat of a credit squeeze still looms.
Much of this deficit derives not from the corporate sector in Germany (which is in rough balance though some companies have clearly taken on a lot of debt over the past year or so) but from countries where the price of credit has risen by more and also where the construction sector has been more important.
Construction is unsurprisingly one of the sectors that is facing more difficulty gaining access to credit and activity has already started to slow. With available supply picking up sharply and prices weakening, this is likely to continue.
The increasing number of weak links within the eurozone economy is likely to become an increasingly worrying problem for Germany, where the robust growth of the past two years has been driven almost entirely by exports and investment. A modest pick-up in German consumption is still likely in the coming year as real wage growth recovers but the extent of the consumer recovery will be limited as it is highly unlikely that the savings rate will fall once the unemployment rate stops falling. Exports therefore remain critical.
Structurally Germany's exporters remain well placed to benefit from the ongoing strength of emerging market investment but the US, the UK, France, Italy and Spain are each more important as export destinations than any emerging market.
Indeed, there are already signs of Germany starting to feel the impact of weakening demand from within the eurozone. The latest German manufacturing orders data show that slowing demand from the rest of the eurozone was the major reason for the 1.3 per cent quarter-on-quarter fall in manufacturing orders in the first quarter of 2008.
Germany is one of the few countries in the eurozone where manufacturing has created any jobs over the past three years. Already the near recessionary conditions in the likes of Spain and Italy mean the latest reductions in Germany's unemployment rate are no longer enough to lower the eurozone average and as the pace of improvement in the German labour market slows. The ECB can do little to influence food and energy prices but signs of easing capacity constraints would ease one of its concerns about the medium-term inflation outlook.
• This report was compiled by the marketing department of HSBC Bank Malta plc on the basis of economic research and financial information produced by HSBC International Bank.
However, aggregate data for the eurozone mask some very large differences between countries. Clearly there are parts of the eurozone, notably Spain and Ireland, where there are a lot of similarities with the housing market and household borrowing issues evident in the US.
Different countries in the eurozone have had varying degrees of reliance on covered bond issuance and securitisation as a means of financing new lending to households in recent years. German banks have not been reliant on securitisation and are not increasing their central bank borrowing significantly. Hence, German banks' interest rates on new corporate loans in March were less than 25 basis points higher than before the beginning of the turmoil last summer
The apparently less acute funding needs of the German banks mean interest rates have barely moved since last summer and new corporate loan growth is strong. In contrast, competition for deposits and a greater sensitivity to variable rates have pushed up deposit and lending rates in France, Italy and Spain, among others.
It is notable that the flow of new corporate loans in France and Spain has been nowhere near as strong as in Germany, which may partly reflect the difference in the price of loans. But even in Germany banks say they are tightening lending standards, although to a lesser extent than in, for instance, France. So why has this not been reflected in credit growth? There is the possibility that factors such as the reduction in bond issuance and firms using un-drawn credit lines may be playing in boosting eurozone loan growth.
Looking forward we continue to expect to see the tightening of lending standards reflected in slower corporate loan growth as banks become increasingly reluctant to provide SMEs, in particular, with credit in the same quantities or on the same attractive terms as previously. While household sector loan growth has gradually slowed over the past two years across the eurozone, the corporate sector has become increasingly dependent on loans. The eurozone corporate sector runs a financial deficit and although this is a textbook economy (whereby the household sector saves to provide funds for productive investment by the corporate sector) it is not such a favourable place to be when the price of credit is rising and the threat of a credit squeeze still looms.
Much of this deficit derives not from the corporate sector in Germany (which is in rough balance though some companies have clearly taken on a lot of debt over the past year or so) but from countries where the price of credit has risen by more and also where the construction sector has been more important.
Construction is unsurprisingly one of the sectors that is facing more difficulty gaining access to credit and activity has already started to slow. With available supply picking up sharply and prices weakening, this is likely to continue.
The increasing number of weak links within the eurozone economy is likely to become an increasingly worrying problem for Germany, where the robust growth of the past two years has been driven almost entirely by exports and investment. A modest pick-up in German consumption is still likely in the coming year as real wage growth recovers but the extent of the consumer recovery will be limited as it is highly unlikely that the savings rate will fall once the unemployment rate stops falling. Exports therefore remain critical.
Structurally Germany's exporters remain well placed to benefit from the ongoing strength of emerging market investment but the US, the UK, France, Italy and Spain are each more important as export destinations than any emerging market.
Indeed, there are already signs of Germany starting to feel the impact of weakening demand from within the eurozone. The latest German manufacturing orders data show that slowing demand from the rest of the eurozone was the major reason for the 1.3 per cent quarter-on-quarter fall in manufacturing orders in the first quarter of 2008.
Germany is one of the few countries in the eurozone where manufacturing has created any jobs over the past three years. Already the near recessionary conditions in the likes of Spain and Italy mean the latest reductions in Germany's unemployment rate are no longer enough to lower the eurozone average and as the pace of improvement in the German labour market slows. The ECB can do little to influence food and energy prices but signs of easing capacity constraints would ease one of its concerns about the medium-term inflation outlook.
• This report was compiled by the marketing department of HSBC Bank Malta plc on the basis of economic research and financial information produced by HSBC International Bank.