Europe's Bank Lending Heralds Downward Spiral

Tyler Durden's picture

Submitted by F.F.Wiley of Cyniconomics blog,

Yesterday’s quarterly bank lending survey capped off a series of indicators with a bleak message for the Eurozone economy. Almost all signs suggest that Europe continues to spiral downwards.

The lending survey, compiled by the European Central Bank (ECB), is one of the best leading indicators of all because it tells us about the critical credit link in the economy. Here’s my explanation for its importance from a post last month:

In a recession, this survey is like a quarterly and economic version of Groundhog’s Day. If it shows lending standards are still tightening, then expect “winter” to continue, because it’s folly to think economies will recover. Economies rise and fall with the rise and fall of credit, and if bankers tell you credit expansion isn’t happening, then economic expansion isn’t happening either. It’s really that simple. This is arguably the best leading indicator of all, even though it’s rarely noticed. For those optimistic forecasters who keep expecting a recovery and getting it wrong, their errors are probably best explained by not giving enough weight to lending standards.

In the Eurozone today, tight credit is part of a vicious circle that includes business retrenchment, weakening demand, job cuts and falling incomes. And the scariest thing about the circle is that it feeds on itself – each part reinforces the other parts. It won’t go on forever, but we need to see some improvement in the leading edge of the economy before we can expect it to end.

Lending standards are one place to look for such improvements. Others include house prices and construction, real wages and incomes, and corporate profits. We’ve seen new data in each of these areas over the past month, and here’s what it’s telling us:

Lending standards

Although there was some improvement in the first quarter, the percentage of banks that tightened standards for both business loans and house purchases continued to outnumber the banks that loosened standards. Together with a rise in non-performing loans as economies weaken, the survey suggests that banks aren’t yet ready to lead the Eurozone out of recession.  And neither are businesses and house shoppers: another section of the report shows that the net percentage of banks that are seeing increasing (versus decreasing) demand for credit is -24% for business loans and -26% for housing loans.

europe vicious circle 1

House prices and construction

Housing and construction nearly always rise and fall in advance of other sectors in the economy. While there are sharp differences within the Eurozone, aggregate data shows these sectors in clear Tom Petty territory – they’re free fallin’.

europe vicious circle 2

Real wages and incomes

In the later stages of recession, real wages typically begin to grow before coincident indicators such as production. The labor cost index released last month showed that we haven’t yet seen such a pick-up. And household disposable income is especially weak, reflecting cuts in hours worked as well as employment.

Europe vicious circle 3

Corporate profits

Although company reports are more timely, Eurostat’s figures for gross operating surplus (GOS) are worth watching as a proxy for aggregate corporate profits (before depreciation and amortization). Data released this month showed the annual growth in GOS slipping into negative territory.

europe vicious circle 4

In addition to the indicators above, two other places to look for a possible boost are the external sector and government spending. But an export-led recovery seems doubtful as long as economies in other regions remain subdued, at best, and the Euro continues to lose ground in the global currency war. Public spending in the Eurozone was essentially unchanged in the last half of 2012, and its flat trend is likely to continue this year.

Where does this leave us?

As far as the most telling leading indicators, those that can be directly manipulated through monetary policy are the only ones pointing to a possible end to the vicious circle.  In other words: interest rates and equity markets.

But low policy rates, tightening bond spreads and occasional equity market rallies seem overwhelmed by the bigger picture. Until we signs of strength in at least one or two of the leading indicators discussed here, bet on the recession to continue.

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Ahmeexnal's picture

Russia about to crush JPM and Germany for taking down gold:

LawsofPhysics's picture

Good hypothesis, now what is it they are going to do exactly?  What's the trade?

Stoploss's picture


What recession???

youngman's picture

And this is what the Central Banks told us they were there to save.....getting the loans flowing failure it seems to me...I think people are just getting thin....holding the cards close because they do no know what the hell is going on...its fear....and fear is hard to remove...i think the players have to change to get the confidence back in the economy...the government run economy scares least business owners...

THE DORK OF CORK's picture

Its  a corporate wet dream.

Everything on a human scale must be crushed to maintain the ratio of profit over wages.

Lidl and Aldi are making huge profits from this very nasty Euro Soviet.

They will push out all other retail stores as the other stores profits decline.


LawsofPhysics's picture

Indeed, no lending, buying stawks.  Free money for everyone, everywhere.  Prior to the global eCONomy, this type of insanity was contained.  Not so much now, this should end well.

andrewp111's picture

Central banks should buy penny stocks. Then the little guy can get into the game.

Haole's picture

Did McCain just declare war on Syria?

Re: Letter regarding use of chemical weapons, crossing the "red line", supplying weapons to "opposition", etc?

Wonder what the Russians might have to say about this, aside from declaring WWIII of course..?


Sandmann's picture

Iran will seek to spread any conflict to Israel and Egypt and create a wide-ranging regional war to bankrupt the USA

LawsofPhysics's picture

"to bankrupt the USA" - Surely you jest.

Dr. Engali's picture

Uhmmmm, the U. S. is already bankrupt.

Ahmeexnal's picture

Well, the chechen boy was on food stamps yet he had a bmw.

Doubleguns's picture

We are nearly 17 trillion past broke, how far to bankruptcy?

Mojeaux18's picture

That depends on the interest rate and how much of the gov't income is swallowed in interest payments.  With the Fed controling the interest rate they have that covered.  Now why shouldn't I trust a fool proof plan again? "No way housing prices will ever drop" rings a bell but I can't quite put my finger on it...

Doubleguns's picture


NoDebt's picture

Well, since the world's central banks are now buying all kinds of assets (like equities, as described in another ZH article today), perhaps they can take loans from the commercial banks as well.  That would get lending rolling in a hurry.  And you know they're good for it because they have a printing press in the basement!


youngman's picture

We will soon ...maybe soon???..find out what a RED LINE means to Obama.....

Alpha Monkey's picture

Think CB's will still buy stawks if WW3 breaks out?

andrewp111's picture

They may have to. How else can you finance critical war industries in a mega-depression?

steve from virginia's picture




@ Wiley sez:

"In the Eurozone today, tight credit is part of a vicious circle that includes business retrenchment, weakening demand, job cuts and falling incomes. And the scariest thing about the circle is that it feeds on itself – each part reinforces the other parts. It won’t go on forever ... "


It won't go on forever ... Of course it won't go on forever ... industrialization will be exhausted first.


It will go on seemingly forever -- the crushing of European economies -- as long as one car runs in any of these countries. The longer the cars run the more destruction will be visited on these economies.


It won't go on forever because every liter of fuel must be imported with expensive borrowed money.


It won't go on forever ... nobody wants to end the current party even though the cocaine -- fossil fuels -- is now scarce and expensive. Add the cost of fuels to the cost of credit and subract the returns on the use of the fuel ... guess what? There are no real returns on the use of fossil fuels! The absence of return is why all these countries are broke!


What will go on forever?? What is being cannibalized by industry is capital. When it's gone, it's gone ... forever.

The Dancer's picture

And the question is...what will make them dump stocks?

jerry685's picture


"And the question is...what will make them dump stocks?"


And who do they plan to dump in on....Buyer beware...for sure at these levels...