KfW: New Lending in Germany Shows Slow Recovery Path

New lending by German banks to businesses and self-employed individuals remained below the previous year's level at the start of 2024 but has stabilized since autumn, as indicated by KfW Research. This stabilization follows a surprising growth in the German economy during the first quarter and the end of the interest rate hiking cycle. After double-digit contraction rates in prior quarters, the decline in new lending eased to 3.9% in the first quarter compared to the same period last year. KfW Research anticipates this slow recovery to continue, with new lending projected to have dropped by just 2% in the second quarter and potentially returning to moderate positive growth rates from the third quarter.

The negative impact of fixed capital expenditure and the still high general interest rate level on loan demand has lessened in recent months. Enterprises are reportedly applying for more inventory and working capital loans again for the first time in a year. As business confidence improves and investment expenditure is expected to grow in the second quarter, driven by rising sales expectations amid recovery in international demand, business investment is likely to support new lending more strongly.

The interest rate turnaround is expected to provide only a minor boost to credit demand for now. Loan interest rates for businesses have been stable since October 2023, with the market having priced in the European Central Bank's June rate cut. As inflation gradually eases, loan interest rates are likely to begin falling only in the second half of the year, which should bolster new lending business going forward.

On the credit supply side, banks are showing signs of the tightening cycle, which began in 2022, coming to an end. Banks reported hardly tightening lending criteria at the start of the year, and the rejection rate for loan applications from businesses remained nearly unchanged from the previous quarter. Banks cite Germany's weak economic performance and businesses' credit standing as factors hampering lending. An economic upturn in Germany would likely encourage banks to ease their requirements. However, if business insolvencies continue to rise in certain sectors, restrictive lending conditions may persist, though stabilization signs are emerging.

Dr. Fritzi Köhler-Geib, Chief Economist at KfW, summarized the findings by stating that while prospects for a sustained rebound in new lending have improved, the pace of recovery remains slow. Positive growth is expected to return once the economic recovery firms up and the interest rate turnaround more strongly reflects in financing conditions, most likely in the second half of the year. She also highlighted that planning certainty influences business investment decisions and financing needs, with factors like geopolitical developments and trade conflicts dampening investment interest.