KfW Research: Weak business investment is an obstacle to recovery of lending business

• New lending dropped by 2% in the second quarter
• Prospects for the third quarter gloomy
• Expected reduction in key interest rates could provide a little impetus

The recovery of German banks’ lending to businesses and self-employed persons flattened in the second quarter. New lending dropped by 2% compared to the second quarter of 2023. It had already contracted by 3% in the first quarter. The upwards trend since autumn 2023 has thus slowed. Any radical about-turn is a distant prospect.

Those are the findings of KfW Research’s quarterly Credit Market Outlook. The collapse in business investment, which is symptomatic of the poor overall economic situation, reduced the general financing needs in spring. The fact that overall lending nevertheless remained stable might be an indication that enterprises have an increasing need for financing to cover outlays for inputs and storage.

“Until the end of the year, investments by businesses cannot really be expected to generate lending business,”

declared Stephanie Schoenwald, KfW financial market expert.

“This year the ECB is expected to take further steps to reduce interest rates. Declining borrowing costs are likely to induce a slight revival in credit demand from businesses. There is scope to pass on reductions in interest rates primarily in the field of short- and medium-term lending.”

The increased liquidity needs of businesses arising from a period of generally weak economic activity could also boost new lending.

There are, however, indications that the banks will tighten their lending standards. The already apparent increase in businesses’ payment difficulties seems likely to result in banks becoming more cautious in their lending activities.

“The prospects of any swift recovery of the new lending business appear gloomier in the third quarter. The reticence of businesses to initiate new loans will persist until we see the economic situation improve markedly,”

says Schoenwald.

“Due to the low volume of new lending in the 2023 reference period, new business in the current third quarter will grow by one per cent compared to the prior-year period. In the fourth quarter we can probably expect an easing of monetary policy to make for growth on a similar scale.

N.B.: KfW Research produces the quarterly KfW Credit Market Outlook exclusively for the Handelsblatt. You can access the most recent issue at: https://www.kfw.de/credit-market-outlook.