September 15, 2008

The growth rates in lending to companies and the self-employed in Germany are raising eyebrows. Apparently impervious to the financial crisis and the downturn in the real economy, growth rates have been solid during the last two quarters: the volume of loans outstanding grew 5.2% yoy in Q1 2008 and by no less than 6.4% yoy. in Q2. There has even been double-digit growth in loans to the manufacturing sector for several quarters. In the euro area as a whole, too, lending to non-financial enterprises remains very expansive – despite recirculating rumours to the contrary –  at a growth rate of 14% yoy.

A series of factors have been cited as potential causes of this – at first glance – astonishing phenomenon. There has been some conjecture that companies have drawn on existing credit lines to ensure access to funds. There has also been some speculation as to whether borrowing is being chosen as a substitute for raising funds on the capital market, where many segments remain only partly functional. And lastly, the strategic reorientation of the banks has also been mentioned as a possible cause.

What is more likely is that the credit volumes constitute a lagging indicator: this means that the high growth rates presumably first and foremost reflect the very optimistic expectations for the economy that existed well into spring. Comparing the ifo business climate index and the credit volume growth rate does indeed reveal that the trend in borrowing did follow that of the ifo index with a time lag. Assuming that this correlation also continues to hold, lending growth should slow significantly in the near future.