German firms struggle to secure loans as economic uncertainty persists

German companies are finding it increasingly difficult to obtain funding, according the Munich-based think-tank, the IFO Institute.

The group’s Credit Constraint Indicator, which measures firms’ access to bank loans, was reported to be at its highest level in seven years on Monday.

More specifically, 32.9% of around 2,000 surveyed businesses reported restrictive behaviour on the part of banks in September. That’s up from 27.1% in June.

Looking at results across sectors, the index rose sharply among service providers (from 27.0% to 35.7%) and among industry (from 26.2% to 34.3%). 

Professor Klaus Wohlrabe, senior economist at the IFO said: “A lack of orders in many sectors is causing banks to take a closer look when performing credit checks. Since companies in Germany are currently investing little, it would be good if they could obtain loans more easily.”

Some sectors claimed it was nonetheless easier to secure funding in September.

The indicator for construction companies dropped (32.2% to 20.7%), as did the total for wholesale businesses (24.6% to 23.2%), and retail (30.0% to 27.0%).

The prospect of ECB cuts

Benjamin Born, professor of macroeconomics at the Frankfurt School of Finance & Management told Euronews Business: “The German economy has been stuck in a prolonged slump for over a year. There is significant uncertainty surrounding both short – and long-term business models, and this creates a vicious cycle.”

He added: “Firms are hesitant to invest and banks are equally cautious about lending. A glimmer of hope lies in the anticipation that the European Central Bank (ECB) will continue to ease monetary policy on Thursday and potentially into the following year, which could help improve financial conditions.”

When firms struggle to access bank loans, this limits business investments and job creation – which can negatively affect economic growth.

If the ECB decides to cut interest rates at this Thursday’s meeting, loans will become more affordable for firms.

Added to this, lower borrowing costs can stimulate economic activity and business success, creating a safer lending environment for banks.

A risky lending environment

Last week, Germany’s economy minister Robert Habeck announced that the economy is expected to shrink by 0.2% this year, marking the second consecutive year of contraction.

While Germany was hit hard by Europe’s energy price spike and a weak Chinese economy, its current woes can also be blamed on more long-term, structural challenges.

In particular, the country’s infrastructure is lacking, its population is ageing, and productivity is restricted by excess red tape.

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“In the current economic context, it is of little surprise to see banks constrain credit supply to companies in Germany,” said Matthias Meier, Assistant Professor of Economics at the University of Mannheim.

“In the absence of stabilisation policy, economic contractions coincide with increased corporate credit default, putting banks in a difficult situation and explaining their constrained credit supply.”

Meier told Euronews Business that debt refinancing could also make lending riskier by making firms more vulnerable – as many companies will see repayment costs rise on existing loans.

“Another factor is the large amount of long-term debt that was built up over the long period of historically low interest rates preceding 2022. Much of this debt will come due in an environment with substantially higher interest rates,” he explained.

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