KfW Credit Market Outlook: New lending has cooled considerably

• Growth was down 0.3% year-on-year in the third quarter
• Lower demand is the main cause
• Downward trend will continue and accelerate

After new lending to enterprises in Germany saw very strong dynamics in the first half of the year, mostly as a result of businesses’ very high liquidity needs caused by turnover losses due to the pandemic, a trend reversal is now emerging. New lending by banks and savings banks in Germany was just barely in positive growth territory, up 0.3% in the third quarter, according to KfW Research’s Credit Market Outlook (previous quarter: 6%). Activity in the corporate lending market is set to continue weakening far into the next year.

The main cause for weaker lending is reduced demand. Businesses remain in a difficult financial situation as a result of the coronavirus crisis, and they face extremely high uncertainty about future economic conditions. Many companies are therefore revising their investment projects. This is reflected in the slump in business investment across the aggregate economy, which was more than 10% below the previous year’s level in nominal terms – averaged over the second and third quarter. Credit demand for investment purposes was therefore muted, and the acute financial distress brought on by the pandemic should now also have passed its peak. In addition to government assistance, the swift economic recovery in the summer months is sure to have brought relief as well. Furthermore, enterprises have now had opportunity to adapt to the pandemic conditions by cutting costs, reducing turnover expectations and innovating. Even though businesses borrowed heavily in the first half of the year, most are likely to have planned ahead and built up liquidity buffers that sustain them over an extended period of time.

“Businesses are very reluctant to invest and are in an improved liquidity position, and this slowed demand for credit”, commented Dr Fritzi Köhler-Geib, Chief Economist of KfW. “Supply-side restrictions on credit access, on the other hand, probably played only a minor role. Banks are still tightening their lending policies within limits.”

KfW Research expects new lending to stagnate in the current final quarter and to drop by 3% in the first quarter of 2021. To be sure, the second wave of infections is likely to sporadically aggravate the liquidity situation. But that should remain limited owing to the generous financial assistance being offered by the government to directly affected sectors. “We do not expect investment activity and corresponding credit demand to pick up significantly before most of the pandemic-induced uncertainty has disappeared. Despite good news on vaccines, that will take some time yet. Keeping access to credit open for companies that want to invest now in order to be prepared for future challenges and opportunities is therefore all the more important”, said Dr Fritzi Köhler-Geib.

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