KfW Credit Market Outlook: New lending to enterprises in Germany sees strongest growth since financial market crisis

• New corporate loans up 4.8% in second quarter of 2017
• Business investment is recovering again as capacity utilisation increases and strong business cycle continues
• Outlook remains good for now but questions arise over sustained trend reversal

According to estimates by KfW Research, the pace of new lending from banks and savings banks in Germany to enterprises and self-employed persons keeps growing. It was up 4.8% year-on-year in the second quarter of 2017, another sharp increase after +2.9% growth already in the previous quarter. Lending is thus growing at a rate not seen since the onset of the financial market crisis. And the reason is a far more pleasing one. While the abrupt economic slowdown ten years ago created the need for enterprises to increasingly take up short-term loans to bridge liquidity gaps, the current revival reflects the continuing robust business cycle in Germany which is encouraging businesses to invest more – and thus creating growing demand for credit.

‘There is a good chance that new lending business will grow at a vigorous pace into the year 2018’, commented Dr Jörg Zeuner, Chief Economist of KfW. For a long time, German enterprises refused to be drawn to the lure of low interest rates. ‘This is now changing’, Zeuner explained. ‘The cyclical upturn is entering its eighth year, production capacity utilisation is high and rising, business confidence is outstanding – so I assume that the urgently needed expansion of capital stock is now moving forward and that the momentum of corporate investment will pick up noticeably this year and next. Businesses’ funding requirements will therefore grow as well.’

However, the current recovery of the lending market cannot be seen to herald a lasting trend reversal. New loan commitments remain far below the level at the turn of the millennium, and significant structural changes in businesses’ funding behaviour have also become evident since then. ‘Businesses prefer internal funding, are strengthening their equity base, and avoid debt wherever possible. This trend is going hand-in-hand with a declining investment-to-GDP ratio,’ said Zeuner. There are no signs that businesses will change this behaviour again. ‘After all, they can continue to build on their great internal funding strength, especially since the tighter regulatory requirements combined with an economic slowdown might test the banks’ lending propensity at any time.’

KfW Research calculates the KfW Credit Market Outlook exclusively for the German business newspaper Handelsblatt. The current edition is available at: www.kfw.de/kreditmarktausblick.