KfW Research: KfW Credit Market Outlook: Businesses are borrowing less

• Lending to businesses and self-employed persons fell to a low in the third quarter of 2023, expected to drop sharply in the fourth quarter as well
• Rising investment expenditure contrasts with slump in borrowing
• Banks continue to tighten lending criteria

The current KfW Credit Market Outlook shows that lending from German banks to businesses and self-employed persons has continued to fall. According to calculations by KfW Research, new lending from banks to corporate customers fell by 3.8% year on year in the second quarter of 2023. Thus, lending activity turned out slightly weaker than forecast. The downward trend looks to have accelerated significantly once again in the third quarter. New lending likely dropped by around 15% on the previous year. The pace of the decline is set to slow in the current final quarter, although a double-digit drop should again be expected.

The slump, which appears substantial at first glance, is mainly due to the exceptional economic situation that prevailed in the comparison period. In the summer of 2022, the energy crisis in combination with supply chain disruptions had led to high financing requirements and record-high lending activity. Since then, businesses have sharply reduced their borrowing, and demand is likely to remain weak or weaken further. High financing costs in particular likely reduced businesses’ appetite for new debt. The rise in average loan interest rates continued in the summer, and in September, at 5.3%, was around three times as high as at the start of the year 2022. This presented considerably stronger incentives for businesses to optimise their financial and liquidity planning. The continuing improvement in the supply of raw materials and inputs is creating scope for keeping the financing of stockpiles and working capital on low levels.

In the face of rapidly rising interest rates and the difficult overall economic situation, business investment in the first half of this year showed itself to be quite resilient, increasing on a price-adjusted basis as well. That is likely to have slowed down the decline in credit demand – even if it must be assumed that companies reduced the share of new loans for investments in their funding mix wherever possible because of increased borrowing costs.

On the supply side, weaker economic estimates prompted banks to become more cautious in their lending practices. The sharp deterioration in the economic environment in the course of the third quarter likely played a pivotal role. Sentiment indicators embarked on a downward trend during that period. This is consistent with the development of the KfW ifo Credit Constraint Indicator, which recently surged for both large enterprises and SMEs.

“Overall conditions for the corporate credit market do not favour a rapid revival of new lending business”,

said Dr Fritzi Köhler-Geib, Chief Economist of KfW.

“I expect the ECB to begin cutting interest rates not before the third quarter of 2024, and it will probably take a few months yet for economic growth to pick up pace again. In light of the predominantly poor sentiment, there is much to suggest that corporate investment activity is now losing momentum. We therefore expect a sideways to slightly downward movement in new lending commitments to corporate customers. That will be sufficient to allow lending growth to rebound from the low of the summer quarter. However, a return to positive territory cannot be reasonably expected until sometime in 2024.”

Note:
KfW Research calculates the quarterly KfW Credit Market Outlook exclusively for the German business newspaper Handelsblatt. The current edition is available at
www.kfw.de/kreditmarktausblick