KfW Research: Credit market has passed its trough

• Decline in new lending to enterprises and self-employed persons slowed to -12.5% in the final quarter of 2024
• Contraction of 3% expected in the current quarter
• New lending is set to pick up in the course of the year as interest rates show signs of easing

New lending from banks and savings banks in Germany to enterprises and self-employed persons has passed its trough, according to calculations by KfW Research. According to the current KfW Credit Market Outlook, the decline in new lending slowed in the final quarter of 2023 to -12.5% on the previous year, after a staggering -15.7% drop in the third quarter. KfW Research expects the rate of decline to continue slowing in the ongoing first quarter of 2024 and new lending to pick up again in the course of the year.

The sharp downturns in new lending in the second half of 2023 were driven by economic stress factors, high interest rates, the gloomy economic situation and a base effect in the reference period of 2022. At the time, the energy crisis had created high borrowing needs for businesses and led to exceptionally high new lending volumes. The current level of new lending continues to be well above the level before the energy crisis triggered by Russia’s war of aggression against Ukraine. Overall, the supply of credit for businesses remains intact.

Positive signs on the credit demand and supply sides indicate that the rate of contraction in new business lending is continuing to slow. According to the Bank Lending Survey of January 2024, the slump in demand from businesses became much less pronounced towards the end of the year. After rising sharply up until October 2023, interest rates have since begun to fall, particularly on loans with longer maturities. The importance of high interest rates as a reason for not borrowing is also decreasing. Demand for credit is also being dampened by the weak investment appetite of businesses, which is suffering from high financing costs, high uncertainty and a pessimistic economic outlook. KfW Research expects investment to decline again in the current quarter and to recover again slightly in the later part of the year on the back of falling key interest rates and a revival in domestic and international demand. At the same time, the supportive effect of business investment for new lending should weaken temporarily before picking up again later in the year. On the supply side, German banks tightened their lending requirements for businesses only slightly in the fourth quarter of 2023.

“First signs give hope that the downturn in the credit market is coming to an end. But in order for the credit market to achieve a sustained turnaround, economic activity must pick up noticeably, and there needs to be more planning certainty for businesses again”,

said Dr Fritzi Köhler-Geib, Chief Economist of KfW.

“A critical factor will be the continued easing of price pressure. This is also likely to boost expectations for a trend reversal in monetary policy later in the year, which would positively impact borrowing costs. For the current quarter, we expect a 3% decline in new lending amid a continuing subdued credit supply and slow growth in demand. Credit demand from businesses is likely to gain momentum in the second quarter as the economy brightens. Lending will likely grow more strongly and remain only slightly below the previous year’s level. In all probability, we will not see the annual growth rate turn positive again until the summer”,

added 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/KfW-Credit-Market-Outlook