KfW Research: KfW Credit Market Outlook: New lending in Germany returns to a path of slow recovery

• Decline in new lending to businesses and self-employed persons moderated to 3.9% in the first quarter
• Weak investment expenditure is dampening businesses’ financing requirements
• New lending business will grow at a slow pace in the second half of the year as financing costs decrease

KfW Research has calculated that new lending by German banks to businesses and self-employed persons remained below the previous year's level at the start of 2024 but has clearly stabilised since autumn with the surprising growth of the German economy in the first quarter and the end of the interest rate tightening cycle. After double-digit contraction rates in the previous quarters, the decline in new lending eased to just 3.9% in the first quarter compared with the same period last year. This slow recovery will likely continue. KfW Research expects new lending to have dropped by just 2% in the second quarter and to potentially return to positive moderate growth rates from the third quarter.

The negative influence of fixed capital expenditure and the still high general interest rate level on demand for loans has eased over the past months. According to the Bank Lending Survey, enterprises were now also applying for more inventory loans and working capital loans again for the first time in a year. Businesses are likely to become even more interested in borrowing as economic sentiment improves. After the weak first quarter, business investment will now decrease for the year compared with the previous year, to be sure. For the second quarter, however, investment expenditure is likely to grow, driven by rising sales expectations amid a recovery in international demand and an improving business environment. Business investment is therefore likely to support new lending more strongly again for now.

The interest rate turnaround is likely to give only a minor boost to credit demand for now. Loan interest rates for businesses have been moving sideways since October 2023. The market had already priced in the ECB’s key interest rate reduction in June. As the inflation rate gradually eases, loan interest rates are likely to start falling only in the second half of the year, bolstering new lending business going forward.

On the credit supply side, the tightening cycle which banks started in 2022 is slowly coming to an end. By their own accounts, banks hardly tightened lending criteria anymore at the start of the year. The rejection rate for loan applications from businesses also remained nearly unchanged on the previous quarter. Banks see Germany’s weak economic performance and businesses’ credit standing in particular as factors hampering lending business. An economic upturn in Germany would likely encourage them to rethink their strict requirements. But if the increase in business insolvencies in some sectors continues, banks can be expected to keep restrictive lending conditions in place. However, there are already signs that the number of business insolvencies is stabilising.

“The prospects for a sustained rebound in new lending business have improved, but the pace of recovery is still slow. Only when the economic recovery firms up and the interest rate turnaround is more strongly reflected in financing conditions do we expect new lending to return to positive growth. This is most likely to occur in the second half of the year”,

said Dr Fritzi Köhler-Geib, Chief Economist of KfW, summarising the findings of the current KfW Credit Market Outlook.

“However, planning certainty also influences businesses’ investment decisions and, thus, their financing requirements. Everything that deepens uncertainty, such as the developments following the parliamentary elections in France, the outcome of the US presidential elections in November and the development of trade conflicts, dampens businesses’ interest in investing.”

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