KfW Credit Market Outlook: unexpectedly sharp rise in corporate lending

• New lending to businesses and self-employed persons jumped by 8.3% in the second quarter
• Stronger growth despite weaker investment momentum
• Trend is driven by interim financings and formation of financial reserves
• KfW Research expects further strong increases up to the end of the year

The upswing in the German corporate lending market is continuing, according to the current KfW Credit Market Outlook. It shows that lending has grown for the past eight consecutive quarters. More remarkable, however, is the strength of credit growth. According to estimates by KfW Research for Germany, new lending from banks to businesses and self-employed persons gained momentum once again in the second quarter of 2018, growing by a strong 8.3% on the same period last year. Credit growth is expected to accelerate further to 10% in the current third quarter.

For the German corporate lending market, which has been on the decline over vast stretches of the past twenty years, these figures merit attention. Although continuous growth was to be expected, an acceleration was not, given the gradual cyclical slowdown. The increase is therefore not due to an imminent corporate investment boom either. “Businesses are continuing to expand their investment expenditure amid increasingly tight capacities, but the pace is slowing down slightly in line with lower business expectations”, said Doctor Jörg Zeuner, Chief Economist of KfW Group. Thus, growth in nominal business investment was 4.5% year-on-year in the second quarter of 2018, one percentage point lower than at the beginning of the year. The unexpectedly sharp rise in corporate lending is driven primarily by other factors: “The present combination of more subdued business prospects, various cyclical downward risks and accumulation of stock in the second quarter is likely to have prompted enterprises to secure interim financings and financial reserves at what are still excellent borrowing conditions, before the imminent monetary policy reversal leads to rising interest rates in the credit market as well”, said Zeuner. “This is consistent with the fact that the current acceleration of credit growth is coming from short and medium maturities up to five years, while growth in long-term loans is steadily trending upward.”

The second half-year will continue to be marked by steady investment activity in an environment shaped by high risks and looming interest rate increases. Corporate lending is therefore likely to continue growing at a vigorous pace. “That does not worry me since Germany's enterprises have healthy balance sheets”, commented Zeuner. “German businesses have given priority to optimising their balance sheets and strengthening their equity base for a long time. As a result, they now have scope to invest on a sound basis, even in times of high uncertainty and temporary weaknesses. This not only reduces cyclical volatility but strengthens the growth prospects of tomorrow.”

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