Saturday, July 29, 2023

Pilkington: "The coming European recession may be worse than 2008"

From Philip Pilkington, free range economist, here via UnHerd, July 28:

Bank lending data paints a grim picture for the Eurozone economy

The European statistics agency Eurostat has released its bank lending survey and the data does not look good. The survey tracks the credit conditions and amount of loan demand seen in the European banking system: as it is based on a survey of lenders, it is typically seen as a “forward-looking” indicator. That is, it picks up on trends before they emerge in the official data.

The release makes for grim reading. Credit supply across the board is tight, with banks reluctant to lend in the face of rising interest rates. Credit demand is poor, too, with Europeans reluctant to take out bank loans. But it is in the commercial sector that the picture looks particularly concerning: demand for loans among businesses is now at historic lows.

“Euro area firms’ net demand for loans decreased strongly in the second quarter of 2023,” the authors write, “dropping to an all-time low since the start of the survey in 2003.” This means that commercial loan demand is now lower than it was in the depths of the credit crunch of 2008-09, particularly worrying since high energy prices are currently putting pressure on European firms. This data is wholly consistent with the idea that Europe might be undergoing a profound deindustrialisation.

This may just be survey data, but it correlates clearly with the hard data typically released later by statistics agencies, enabling forecasts of future developments. The chart below shows the “soft” lending data together with the “hard” data of European fixed investment. It is not hard to see that the two are strongly correlated....