Growth rebalancing likely to take time in Euro Area

Member states have started to release Q2 preliminary GDP data. Spanish GDP growth accelerated by 0.1pp to 1.0% q/q, its fastest pace since March 2007. The Spanish economy has a further 3.9% to recover before returning to its pre-crisis level – which we expect to be reached by end-2016. Belgium Q2 preliminary GDP growth remained unchanged at 0.4% q/q after a 0.1pp upwardly revised Q1.

"We continue to expect euro area Q2 GDP to increase by 0.4% q/q," forecasts Barclays.

On the supply front, a slight headline divergence in July PMIs and EC business confidence does not constitute an early worry for Q3, in our view. Euro area “Flash” PMI’s slight fall may get revised in the final form next week as the indicator tends to be more volatile than the EC’s, and PMI composite output remained well in the 53s. Furthermore, this week EC economic sentiment increased 0.5 points to 104, its highest level since July 2011, supported across sectors and many member states. Separately, the Greek index fell more than 9 points to 81.3, hinting at a severe recession ahead.

However, the ECB’s money growth and interest rate data up to June suggest that the rebalancing story is likely to be a protracted one. Focusing on the counterpart of M3 data, private loans only started to grow in the past six months. Furthermore, the bulk of the recovery in private loans in the euro area is driven mainly by loans to households, specifically for lending purchases, while non-financial corporation (NFC) loans are still in negative territory, driven by loans longer than five years. Furthermore, more than half the headline 1.2% y/y private loan growth in June can be explained by loans to intermediaries and insurance pension institutions. In sum, this is only mildly positive, because a lasting recovery in business investment is needed to increase production capacity, and that is likely to require credit to NFCs. Corporate bond and equity issuance did improve post-2009, but has just about compensated for negative lending growth up until now. 

The slow recovery in NFC credit comes in an environment of still-falling interest rates charged on new loans. According to the latest ECB interest rate data up to June, the average interest rate charged across maturities and loan sizes in the euro area reached a new historical low, falling 4bp to 1.96% in June. Interestingly, interest rates charged on new loans with a maturity longer than five years seem to be bottoming. Notably, interest rates charged on new loans of more than EUR1mn seem to be levelling off from a bottom reached in February (Figure 4). Interest rates charged on loans of less or equal to EUR1mn – typically those taken by SMEs – continued to fall in June (-13bp to 2.73%).