Eurozone geared up for lending recovery as Draghi weighs up further stimulus

Chris Papadopoullos
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While lending is forecast to increase, ECB chief Mario Draghi has dropped strong hints that QE will be ramped up (Source: Getty)

Financial conditions in the Eurozone are in line for a buoyant 2016 with economists at a major consultancy forecasting a long-awaited revival in credit growth.

Meanwhile, the currency-bloc’s policy makers could be tempted into expanding their €1.1 trillion (£810bn) money-printing programme as early as this Thursday after dropping numerous hints over recent weeks.

Private sector borrowing in the Eurozone will grow by more than three per cent next year, according to the report published today by financial services giant EY, the fastest pace of lending growth for eight years.

The currency-bloc’s economy has managed to sustain a lacklustre recovery this year after nearly entering a third recession in five years in 2014.

Economists at EY predict the stock of credit to consumers is will grow 1.9 per cent this year and 3.1 per cent in 2016 after contracting for the last four years. This will help to fuel consumer spending, EY said.

Lending to corporates is expected to grow 0.5 per cent this year and by 3.8 per cent in 2016 after shrinking for three years.

“While larger corporates continue to pay off bank debt, new lending to business looks more encouraging than it has for a long time,” said Andy Baldwin, EY financial services leader for Europe, the Middle East, India and Africa.

“It’s the first year new loans to business have grown across all markets since 2012 and the cost of borrowing is also falling, particularly in the periphery economies, which should unlock some demand for lending and encourage investment and growth in the wider economy.”

European Central Bank (ECB) chief Mario Draghi has said the bank stands ready to increase the size of its quantitiative easing (QE) programme if the outlook for growth and inflation worsens. The strongest statements have come from ECB official Ewald Nowotny, who recently said that current policies were insufficient in the fight against weak growth and inflation. The ECB’s next meeting is on Thursday.

“It looks most likely that the ECB will hold fire on more QE at Thursday’s policy meeting as a number of Governing Council members appear to be in ‘wait and see’ mood,” said Howard Archer, chief economist at analysts IHS.

“However, further ECB stimulus as soon as next Thursday certainly cannot be ruled out, particularly given that Nowotny stating last week that it is “quite obvious” to him that new measures are needed to boost Eurozone inflation as even the core rate keeps undershooting.”

Both extended QE and an increase in credit growth would lead to faster growth in the Eurozone's money supply, an indicator of total spending. The ECB's M3 measure – which counts notes and coins in circulation and the electronic deposits held at banks by businesses and individuals – climbed by 4.8 per cent year-on-year in August and has managed to hover around five per cent this year after growing at more sluggish rates since the 2008-9 recession.

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