Eurozone bank lending growth forecast to fall this year and next, as rising interest rates drive a drop in loan demand | EY
Loan losses expected to rise marginally
A weak eurozone economy is likely to drive a rise in non-performing loans across all forms of bank lending, but the EY European Bank Lending Forecast does not expect significant increases this year, and certainly not at levels recorded during and after the eurozone debt crisis. Non-performing loans as a share of total loans across the eurozone are forecast to rise 2.6% in 2023 and 3.9% in 2024, from 1.8% in 2022, as the lagged effect of higher interest rates builds. For context, non-performing loan ratios peaked at 8.4% in 2013.
Spain and Italy are forecast to see the highest ratios of non-performing loans in 2023, at 4.2% and 4.4% respectively, partly due to the high volume of variable-rate mortgages in both markets.
Tighter post-Global Financial Crisis regulation and lending criteria should mean mortgage borrowers are better able to deal with higher rates, while the savings built up by households during the pandemic and low unemployment rates across the region should provide a cushion of support against rising debt servicing costs. On the corporate side, an improved outlook for both energy prices and inflation and recent increases reported on profit margins should act to limit a rise in the share of non-performing business loans.
Nigel Moden, EY EMEIA Banking and Capital Markets Leader, comments: “Achieving lending growth in turbulent times requires a strong capital foundation and high levels of confidence from borrowers. These are pillars of the eurozone’s major banks, which continue to see growth in lending to households and businesses despite a slowing economic backdrop. Europe’s resilience and decisive action in the face of recent banking sector challenges – that posed risks for global markets – illustrates this. Eurozone banks demonstrated unity and capital strength, acting swiftly to prevent serious economic ripples through the region.
“While bank lending growth is set to slow in the short-term, with particularly low growth next year and loan losses expected to rise, impairment levels remain far below that seen post-financial crisis and overall demand for loans is expected to recover by 2025.”
Germany – set for sharpest decline in lending growth of major eurozone economies
Germany is forecast to record the slowest GDP growth rate this year of the major eurozone economies, largely due to weak activity at the end of 2022 and the start of 2023, and the headwinds facing its industrial sector. However, the recent fall in energy prices should curb any downturn. Overall, German GDP is forecast to shrink 0.4% this year, before growing 1.2% in 2024.
The prospects for bank lending growth in Germany this year are also expected to be weak, although are still expected to outperform a number of other eurozone markets. Growth in overall bank lending is forecast to slow from 6.9% in 2022 to 2.8% in 2024. Mortgage lending is predicted to grow 0.5% in 2023 – the weakest since 2009 – following 5.3% growth in 2022.
Consumer credit is forecast to see a 0.6% increase in 2023 before growth accelerates to 1.8% in 2024. On the corporate lending side, the stock of business loans is expected to slow to 4.7% growth – from 8.9% in 2022 – before contracting -0.4% in 2024, as the lagged effect of high interest rates is felt on business investment.
France – demonstrating greater resilience than eurozone peers
The French economy has recently displayed more resilience than the wider eurozone. French GDP grew 0.2% in Q1 2023, although this was accounted for largely by net exports. Overall, the EY European Bank Lending Forecast expects growth to be subdued in the second half of 2023 due to inflation and the high price of essentials weighing on demand, and annual GDP growth is forecast at 0.5%.
Total bank lending is forecast to rise 3.6% in 2023, boosted by growth in mortgage lending which has outpaced other major eurozone economies. However, while French mortgage lending is predicted to rise 3.2% this year, this represents a slowdown compared with 5.5% in 2022. As interest rates fall, growth is forecast to recover to 4.6% in 2024. Consumer credit is forecast to rise 2.6% in 2023, down from 3.5% in 2022, and growth in business lending is expected to slow to 4.2% in 2023 from 7.3% in 2022, and, similar to the German market, contract (-0.4%) in 2024. A return to growth though is expected in 2025, with all types of lending making a recovery.
Spain – mortgage lending fell sharply at the start of 2023
Following a relatively strong start to 2023, Spanish GDP is forecast to grow 2.3% in 2023, up from the 0.8% growth forecast in the last EY European Bank Lending Forecast. This is principally because of Spain’s well-diversified energy sector, its services-focused economy, and an ongoing recovery in its tourism sector.
However, in terms of total bank lending, the EY European Bank Lending Economic Forecast predicts Spanish banks will contract -1.2% in 2023, reflecting weakness in late 2022 and early 2023. Among the categories of lending, only consumer credit is forecast to report a rise. The EY European Bank Lending Forecast predicts consumer credit growth of 3.1% in 2023.
Business lending is expected to fall 2.1% this year, before rising 1.5% in 2024. On the mortgage side, EY European Bank Lending Forecast predicts a -1.7% contraction this year in large part due to the structure of Spanish mortgages, where the vast majority are variable rate contracts, which means the housing market is exposed sooner to rising interest rates than many other eurozone countries.
Following loan losses falling to 3.5% in 2022 – the lowest since 2007 – they are forecast to rise to 4.2% this year and 5.8% in 2024.
A return to growth is expected across all forms of lending from next year, and total bank lending is forecast to rise 1.2% in 2024, and 3.2% in 2025.
Italy – slow growth in 2023
Falls in wholesale energy prices, strong construction activity and a recovery in tourism boosted Italian GDP in the first quarter of 2023. GDP growth is forecast at 1.2% this year and 0.9% in 2024. However, these rates are a slowdown from the 3.8% growth in 2022.
In terms of overall bank lending, the forecast predicts growth of 0.6% in 2023. Mortgage lending is forecast to rise 1.4% this year, down from 4.2% in 2022. Consumer credit is forecast to rise 2.3% this year, while business lending is expected to contract -0.2%, before rising to 0.8% growth in 2024. Like the other major eurozone economies, a return to growth is expected across all forms of lending from 2024, with total growth of 1.3% forecast, rising to 3.1% in 2025.
Notes to editors:
The EY European Bank Lending Economic Forecast is based on economic forecasts using data from the European Central Bank, and covers the eurozone, Germany, France, Spain and Italy.
