• As per the ECB’s February ‘monetary developments’ release, the aggregate credit trend in the Euro Area continues to improve. Loans to the private sector are now only down 0.1% on a year ago versus -0.2%yr in January and -0.5%yr in December. 
  • Coming just after the full-implementation of the ECB’s alternative easing measures, the ECB will likely see this as a very positive sign for the outlook. Yet the detail of the ECB credit data highlights that the private-sector credit environment remains challenging for most. 
  • A material portion of the trend improvement in total private sector credit has come as a result of improved loan provision to the finance sector, now up 0.8%yr (excluding insurance corporations and pensions funds, for whom credit is up 15.3%yr). 
  • For the non-financial private sector, while the retrenchment of credit is abating, there is little evidence in favour of the view that real economic activity is about to experience persistent, positive growth driven by new credit. (Note the discussion below refers to unadjusted balance sheet data to allow for detailed comparison.) 
  • Households have experienced little change of late. The decline in consumer credit has lessened, from -4.1%yr in February 2014 to -1.3%yr currently; lending for house purchase is little changed from a year ago, circa 0.5%yr. A need to erode savings to fund marginal consumption (evinced by the consumer sentiment report); the structural adjustment underway in the periphery; and the marked deterioration of the French labour market in recent years all stand as material headwinds to progress – headwinds which are unlikely to abate until firms are willing to expand domestic capacity. 
  • On this matter, France has seen material growth in loans to nonfinancial corporates, now up 4.1%yr compared to -0.9%yr a year ago. Of particular note is that this is not only short-term financing: the stock of loans with a duration of 1-5 years is up 8.6%yr; and loans with a duration of over 5 years are up 2.7%yr. Assuming the funds are spent at home (which is not guaranteed), this flow of credit should give much needed support to gross fixed capital formation, which fell 1.6% in 2014 following 2013’s 0.8% decline. 
  • Unfortunately France is currently the only nation experiencing a material improvement in non-financial corporate credit. Germany is the next best large nation, with annual growth of -0.1%yr. In Italy and Spain, credit has declined 3.5%yr and 9.7%yr respectively. Further, for the region as a whole, term funding has led the decline. The stock of loans with duration of 1-5 years are down 0.4%yr and loans over 5 years are -2.9%yr. Conversely, loans with a maturity of less than a year are up 4.1%yr. This suggests new credit is being provided/demanded for inventory and trade credit, not investment. 
  • The above analysis synchs with the view that we are a long way from seeing an enduring, positive real investment uptrend take root in the Euro Area. Further, the weak state of the aggregate household sector gives little reason to expect broad-based gains in household demand, despite a liquidity and confidence-driven wealth effect for the top income decile, where wealth is concentrated. 
  • Seemingly the Euro Area’s greatest hope for growth is the continued erosion of the value of the Euro, in part due to the liquidity offered by the ECB to domestic financial institutions (and corporates) being ‘put to work’ elsewhere. Exporters and their employees benefit from increased competitiveness; corporates (and households) with foreign operations (assets) receive a profit and valuation boost; but many others with little-or-no foreign exposure miss out. These are factors which we will discuss in depth in due course. 

Courtesy of Westpac Research

The material has been provided by InstaForex Company – www.instaforex.com