Sluggish credit threatens eurozone recovery

(FRANKFURT) - Credit growth in the eurozone slowed sharply in July despite massive bailouts for banks, threatening to undermine a tentative economic recovery in the region, experts warned Thursday.

Credit to the private sector grew just 0.6 percent last month compared to July 2008, whereas it had gone up 1.5 percent in June and 1.8 percent in May, the European Central Bank (ECB) said on Thursday.

"Today's monetary numbers illustrate how fragile the ongoing recovery is," said Carsten Brzeski from Dutch bank ING.

"Of course, a strong slowdown in credit growth is quite normal when the economy is in the middle of a severe recession but the credit cycle needs to follow improved sentiment soon to get the recovery really going."

Ben May of Capital Economics in London said in a statement that "with still few signs that banks are becoming more willing to lend, a strong V-shaped recovery seems unlikely in the eurozone."

A V-shaped recovery is one where the economy returns to growth after a sharp sustained fall, recovering all the lost ground relatively quickly.

Analysts at Barclays Capital Research said banks and borrowers were watching the economic outlook closely and it may take some time before lending and borrowing picks up again.

"Bank lending to non-financial firms is a lagging economic indicator: it lags the investment cycle," they wrote.

"In a recovery phase, it tends to be improving profits that will drive the first upswing in investment, and then only after a lag will companies feel confident enough to go out and borrow to fund further expansion in investment."

Also on Thursday the ECB published M3 money supply figures, a key indicator of credit and demand in the economy, which rose 3.0 percent in July on a 12-month comparison compared to 3.6 percent in June.

Economists polled by Dow Jones Newswires had expected growth of 3.1 percent.

It was the fifth month of downward movement for the indicator, showing a lack of inflationary pressure and indicating that the ECB will keep its low interest rate policy for the near future, May said.

The ECB has been helping out banks for months by providing liquidity at low rates, along with other, non-standard monetary policies, to try and boost lending into the real economy and bolster a nascent recovery.

"The ECB is likely to interpret today's data as signalling that the profound nature of the financial crisis means that, from a monetary policy perspective, we are still in for a 'long haul'," said analysts at Barclays Capital Research.

"Monetary policy, including the full panoply of 'non-standard operations', will need to remain highly accommodative for a substantial period of time."