Over the past few years, growth in loans to enterprises in Germany has been characterised by unusually strong ups and downs, according to the current issue of the Monthly Report. Although monetary policy responded to the inflationary surge that began in 2021 with substantial tightening, loan growth initially accelerated further to just under 14 % by October 2022. From the fourth quarter of 2022, however, net lending declined sharply; most recently, credit growth was close to zero. This development was reflected across all categories of banks, maturities and economic sectors, the article states.

Subdued credit growth due to adverse economic environment

The Monthly Report explores whether such developments in lending were out of the ordinary when viewed alongside economic and interest rate developments, and examines the role played by credit supply and credit demand factors. It is apparent that the government support loans granted to selected energy suppliers in 2022 were a key factor in the initially observed increase in loan growth. The models used by the Bundesbank’s experts suggest that the downturn in net lending at the end of that year and the current stagnation of net lending are mainly attributable to the adverse economic environment, which, they write, “was characterised in particular by a slowdown in economic activity, high inflation rates and rising interest rates.” Banks responded to the steep rise in financial market interest rates by raising lending rates accordingly, and tightened their lending policies in view of the increased credit risk. However, the models gave no sign of a conspicuous restriction of credit supply based on purely bank-related factors. 

Weak economy and uncertainty dampen demand

On the demand side, the tough economic environment and heightened uncertainty about the economic and geopolitical outlook dampened firms’ investment, thus reducing financing needs. Many enterprises also had sufficient internal financing at their disposal due to factors such as the high profits of recent years. The authors noted that, despite the relatively strong decline in credit demand caused by the above, model calculations indicated that it was largely in line with historical patterns overall.

Bundesbank expects loan growth to increase over the course of the year

The Bundesbank’s economists expect a gradual recovery in loans to enterprises in the second half of 2024. They expect that the German economy slowly regaining momentum (according to the Bundesbank’s June Forecast for Germany) plus the gradual reversal of interest rate hikes by monetary policy makers currently anticipated in the financial markets should together bolster lending growth. They note, however, that the projected loan growth rate may rise only slowly, as enterprises tend to use their remaining internal funds during an economic upturn. In addition, the initially still difficult investment environment is set to dampen credit demand.