The key chart
Trends in cumulative monthly flows (12 months, EUR bn) of loans to the EA private sector (Source: ECB; CMMP)
The key message
Financing flows to the euro area (EA) private sector are slowing very sharply. This is unsurprising given the relatively rapid pass through of ECB policy to the cost of borrowing for EA corporates (NFCs) and, to a lesser extent, the cost of borrowing for EA households (HHs). Note that the composite cost of borrowing for NFCs has risen 2.96ppt in the twelve months since June 2022. This compares with a 2.12ppt increases over the whole 32 month, 2005-08 tightening period.
The risk here is that the ECB lacks a playbook for the most aggressive period of monetary tightening in its history. The rapid pace of adjustment in financing flows (see key chart above) suggests that the risk of policy errors are rising rapidly with negative, potential impacts on financing flows to the EA economy and to the region’s future growth prospects. Note again, that in aggregate, NFCs have already paid back loans in seven of the past nine months. The issue here is that the EA relies heavily on bank finance and the region needs more, not less, productive lending and investment.
The warning signs are clear. How will the “data dependent” ECB respond in September?
Flowing over a cliff edge
Trends in 12-month cumulative flows of credit to the private sector (EUR bn) (Source: ECB; CMMP)
Financing flows to the euro area (EA) private sector are slowing sharply. Cumulative monthly flows of credit to the private sector totalled €197bn in the 12 months to July 2023 down from €758bn in the 12 months to July 2022 (see chart above).
Changes in composite costs of borrowing (ppt) in months after start of policy tightening (Source: ECB; CMMP)
The slowdown in financing flows is unsurprising given the relatively rapid pass through of ECB policy tightening to the cost of borrowing (COB) for NFCs and, to a lesser extent, HHs (see chart above).
The composite COB for NFCs has risen 2.96ppt in the twelve months since June 2022. This compares with a 2.12ppt increases over the 32 month, 2005-08 tightening period. The composite COB for HHs has risen 1.73ppt in the twelve months since June 2022. Again, for context, this compares with a 1.79ppt increase over the longer 32 month, 2005-08 tightening period.
The risk here is that the ECB lacks a playbook for the most aggressive period of monetary tightening in its history.
Trends in monthly and cumulative 12m flows of lending to NFCs (EUR bn) (Source: ECB; CMMP)
In aggregate, NFCs have repaid loans in six of the past nine months (see chart above). Cumulative monthly flows have fallen from €390bn in the 12 months to October 2022 to only €85bn in the 12 months to July 2023.
Trends in monthly and cumulative 12m flows of lending to HHs (EUR bn) (Source: ECB; CMMP)
In aggregate, HHs have repaid loans in two of the past three months (in each case, mortgage loans). Cumulative monthly flows have fallen from €285bn in the 12 months to June 2022 to only €40bn in the 12 months to July 2023.
Trends in cumulative monthly flows of loans to HHs, mortgages and consumer credit (EUR bn) (Source: ECB; CMMP)
The rapid slowdown in monthly flows to HHs, reflects mortgage dynamics primarily (see chart above). The composite cost of mortgages has risen 1.73ppt since June 2022. Cumulative flows have fallen from €268bn in the 12 months to August 2021 to only €40bn in the 12 months to July 2023. Despite a 1.85ppt in the composite cost of consumer credit, monthly flows have remained relatively resilient. However, as described in early posts, the demand for consumer credit has lagged well below pre-pandemic levels.
Conclusion
In summary, the rapid pace of adjustment in financing flows described above suggests that the risk of policy errors are rising rapidly with negative, potential impacts on financing flows to the EA economy and to the region’s future growth prospects. The EA relies heavily on bank finance and the region needs more, not less, productive lending and investment.
The warning signs are clear. How will the “data dependent” ECB respond in September?
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.