Uncertain future

Interest No Incentive to Borrow

  • Why it matters

    Why it matters

    As long as US trade policies remain uncertain and the consequences of the Brexit are unknown, European businesses remain reluctant to invest; this means they are also reluctant to loan money to invest.

  • Facts


    • The KfW is backed by the German state and promotes private individuals as well as businesses, cities, municipalities and non-profit and social organizations in Germany.
    • Reluctance to borrow is putting intense pressure on lenders. The average cost of a German loan in January was 1.7 percent, a new record low.
    • Currently loans for housing and commercial property are the most dynamic area of the entire credit business in Germany.
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Not setting loans alight: Despite the best intentions of the ECB and EU central banks, German businesses remain conservative when it comes to seeking new credit. Source: Peter Steffen / DPA

In Germany, the mood at companies is excellent, the economy robust and capacities fully utilized. Despite this, the state-backed development bank KfW is predicting that demand for new loans by businesses will grow only moderately in 2017.

“Investment dynamics remain poor,” says KfW’s chief economist Jörg Zeuner. And this is because extraordinary political risks make it difficult for businesses to plan long-term. Why? Primarily it’s about future economic relationships to partners like the USA or Great Britain.

Businesses are still awaiting details of US trade policy under President Donald Trump. The Brexit has also caused uncertainty and as of this week, British politicians decided that in June their country will elect a new parliament, which will then decide on what course to take in negotiations for leaving the European Union.


“Competition among financial institutions continues to be immense and the pressure on prices goes on. ”

Peter Barkow, CEO, Barkow Consulting

“I don’t expect the new corporate loans business to move out of this sideways trend that we have been seeing since 2011, in any sustainable way,” said Mr. Zeuner. Besides political obstacles, companies are still doing well enough to finance themselves, he said.

According to the bank’s KfW Credit Market Outlook the number of new loans to companies and self-employed people in Germany went up 1.5 percent year-on-year during the first quarter of 2017, but this may drop to just 0.5 percent in the second quarter. During the last three months of 2016, the credit market experienced a temporary peak with growth of 2.6 percent year-on-year, which was due mostly to expectations of climbing credit costs.

Against the backdrop of an increase in prime interest rates in the US and increasing inflation in the euro zone, some German companies decided to move their borrowing up to the fourth quarter of 2016.

But the reluctance of German companies to borrow money remains, and the fact that there are extremely good conditions has not changed that. “The banks want to lend more, than there is demand. Competition among financial institutions continues to be immense and the pressure on prices goes on,” said Peter Barkow, CEO of financial consultancy, Barkow Consulting. The average cost of a loan in January was 1.7 percent, a new record low.

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Loans KfW

“Banks hardly earn anything from classic loans these days in Germany. They continue to see these as a way to open doors to additional business with better profit margins,” one loan fund manager in Frankfurt says.

The KfW Credit Market Outlook focused on the borrowing of money for equipment and machines. Even though loans for housing and commercial property were not focused upon even though they are currently the most dynamic area of the entire credit business. KfW experts believe that an end to the upturn in this sector is not in sight, thanks to high demand and low unemployment.

It is not just in Germany. In general in the euro zone, demand for credit isn’t really rising – despite a flood of money from the European Central Bank, or ECB. The bank announced in February that banks in the euro zone issued 2 percent more loans to companies than they did in February last year.

That is a little less than in January this year, during which there was an increase of 2.3 percent year-on-year. The currency guardians at the ECB are keeping the prime interest rate at a record 0 percent. Every week, the ECB and various central banks are pumping billions into the banking system of the 19-country community by purchasing government bonds. Although the move is partially about shoring up the zone’s less healthy economies, such as in Greece and southern Europe, the theory also goes that this should stimulate Europe’s financial institutions to lend more money and thereby increase economic activity.

Peter Köhler covers funds and private equity firms for Handelsblatt and is based in Frankfurt. To contact the author: koehler@handelsblatt.com

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