Euro area credit monitor

Credit growth outlook

The latest improvements in euro-area bank lending are expected to continue. The progress in lending is supported by fewer supply-side restrictions and the development in demand for credit is crucial for higher credit growth. In October, we expect a slower pace of decline in loans to non-financial corporations of -1.6% compared to -1.8% in September. Loans to households should also have increased 0.7% in October, up from 0.6% in September (both due for release tomorrow).

The upward trend in bank lending should continue after October. The ECB’s asset quality review and stress test, which were released at the end of October, revealed very limited capital shortfall as banks had raised capital in anticipation of the assessment.

The progress in bank lending reduces headwind to economic activity and this is one of the reasons why we expect the recovery to strengthen in 2015. In 2013-14 lending was very weak and according to Draghi a third of the output gap in the periphery countries can be explained by weak credit growth.

ECB’s TLTROs

The potential boost to liquidity from the ECB’s TLTROs depends on bank lending. Given the observations for net lending until September, banks are currently eligible for EUR150bn on the TLTROs starting in March 2015. However, the potential take-up on the TLTROs is still uncertain, as it depends on accumulated net lending until January 2015.

In mid-December the second TLTRO settles and our expectation is for a low take-up. In light of this, we believe it will be difficult for the ECB to expand the balance sheet sufficiently and we expect it to reach for more tools from the toolbox in early 2015.

Money supply outlook

Growth in money supply has also strengthened since April this year and we expect the trend to continue as we look for an increase in M3 money supply of 2.8% in October, up from 2.5% in September. This is above consensus of an increase of 2.6%.

M1 money supply has also improved since February. Real M1 growth has been a good leading indicator for GDP growth on a nine-month horizon and the upward trend suggests that euro activity will pick up again in 2015.

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