Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 01 February 2018 at 10:56 GMT

Credit Impulse Update: The euro area

Head of Macro Analysis / Saxo Bank
The following is a new monthly publication from Saxo Bank macro analysis head Christopher Dembik covering the credit impulse. It will be published on the first trading day of every month.

European Central Bank
Eurozone banks expect rising demand for credit into 2018. Photo: Shutterstock 

By Christopher Dembik

The last quarterly bank lending survey conducted by the Eurosystem and published last week confirmed the improvement in lending dynamics in the euro area. Despite the upcoming exit from quantitative easing, euro area banks expect to see rising demand for credit in the current quarter from both non-financial corporations and households (consumer credit and mortgage loans), along with an easing of credit conditions.

Credit flows for December 2017 slowed down a bit as a result of two strong previous monthly increases. Adjusted for sales and securitisation, loans to the private sector reached +€7bn for NFC (previously +€16bn) and €11bn for households (previously +€16bn).

Taking these figures into consideration, our in-house credit impulse – which leads the real economy by nine to 12 months, is still in positive territory but is somewhat weak. It is running at 0.25% of GDP versus its previous peak of 2.8% of GDP in autumn 2015. The divergence we can observe between the credit impulse and domestic demand, as well as the credit impulse and private investment over the past two years, can partly be explained by NFCs increasingly looking for alternatives to bank financing, such as debt issuance. 

In addition, a growing number of NFCs have enough cash in their balance sheets so as not to require bank lending. Due to a positive base effect, however, we can expect a slight increase in the credit impulse in the coming months.

Credit impulse

Credit impulse
The credit impulse is also driving investors over the longer term. Our in-house model leads the Euro Stoxx 50 by nine months; so far, the impulse has been positive for financial markets leading to a low cost of capital but moving into 2018 we notice that increased optimism about the euro area and higher growth expectations in the US due to tax reform are the more important drivers.

Positive sentiment towards the euro area banking sector has also improved considerably since the beginning of the year with the Euro Stoxx Banks index rising 10%.

Credit impulse vs. Euro Stoxx
Though euro area growth remains well-oriented, we continue to see a number of headwinds that could lead to a slowdown in the medium term. At the domestic level, a rebound in credit flows to NFC will be necessary in the coming quarters to maintain the path of GDP growth. However, it is at the external level that the risk seems higher. The Q3'17 contraction in the US credit impulse along with the Q4 deceleration in demand for C&I loans (which give a broader view of credit evolution) are sources of concern for the euro area recovery.  

— Edited by Michael McKenna

Christopher Dembik is head of macro analysis at Saxo Bank
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Credit Impulse (monthly focus)


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