KfW Credit Market Outlook: Growth momentum will not sustain itself

• Credit market posts unexpectedly strong growth as a result of special effects in 1st quarter
• KfW Research expects new lending activity to slow
• Tense international environment is creating uncertainty in the credit market

According to estimates by KfW Research, new lending to businesses and self-employed persons in Germany (without residential construction and finance institutions) grew by 6.4% year-on-year in the first quarter of 2019, carrying over the momentum from the final quarter of 2018 (+6.6%). The strong growth in new lending of longer-term loans is surprising given the generally disappointing economic development and dampened business sentiment in Germany since the second half of 2018.

Despite the cyclical headwinds, corporate investment in Germany posted surprisingly strong growth of 1.9% at the start of the year. Special effects in the second half of 2018 probably played a crucial role. Among them were investments in company vehicle fleets, which could now be carried out after delays in getting new models WLTP-certified in time for the deadline caused delivery bottlenecks. Vehicle purchases that were credit-financed also impacted on long-term loan commitments.

Growth in corporate investment is likely to weaken as the year progresses because the positive 'automobile effect' was probably only temporary. In light of the continuing uncertainties, particularly the trade conflicts and the still unresolved Brexit issue, the investment motive – which has been intact so far, according to the Bank Lending Survey – should become a weaker driver for borrowing. Both issues increase the likelihood of a decline in the growth of new lending in the coming quarters.

A solution to the trade conflict between the US and China or more clarity in the Brexit process, on the other hand, might stimulate investment activity and indirectly provide positive impetus to lending business.

"The growth trend of new lending is set to point downward again in the coming quarters. The subdued economic outlook in what remains a highly uncertain environment is likely to dampen what so far has been very vigorous credit demand. Moreover, it can be assumed that banks will be slightly more cautious in their lending practices in such an environment. The boom years in the credit market will probably be over soon", said KfW economist Dr Sebastian Wanke.

The current KfW Credit Market Outlook is available at: www.kfw.de/kreditmarktausblick