A report from the European Central Bank, released yesterday, signals challenging times ahead for both households and businesses seeking bank loans. The first quarter of 2024 is poised to witness a continued tightening of financing criteria, particularly affecting the construction sector and mortgage borrowers.
The ECB’s report underscores the escalating caution among banks, driven by concerns over the risks associated with future loan repayments. This trend is notably acute in the manufacturing sector, where lending terms have become increasingly stringent. In contrast, the energy sector has experienced a less pronounced tightening, reflecting a divergent impact across different sectors.
The services sector stands as an exception, with minimal tightening in lending criteria. This is attributed to the sector’s robust resilience, standing in stark contrast to the more vulnerable conditions prevailing in other areas of the economy.
As the ECB prepares for its upcoming meeting this Thursday, the findings of its lending survey paint a sobering picture. Higher interest rates are steadily eroding the demand for loans from both businesses and households, casting a shadow over future investment prospects. However, there’s a silver lining, as these conditions may lead to potential policy easing by the central bank later in the year.
In a notable shift, banks are anticipating a slight uptick in loan demand for businesses and housing in the first quarter of 2024, marking the first such increase since the onset of 2022. This change is partly attributed to improved access to various financing sources like money markets, long-term deposits, and bond issues, though access to short-term retail financing has seen a marginal tightening.
Household loans, particularly in consumer credit and housing, are experiencing a continued tightening in credit criteria. However, this trend is showing signs of moderation compared to the previous quarter, with the tightening in housing and business loans falling below historical averages.
Looking ahead, eurozone banks are bracing for further tightening in credit standards across all loan categories, largely due to the prevailing interest rate environment. This tightening is expected to dampen loan demand, exacerbated by low fixed asset investment and weakened consumer confidence, particularly impacting housing loans. The decrease in demand, though less severe than in previous quarters, remains a significant concern, particularly for the housing loan sector.