Eurozone lending falls even as money supply rises: ECB

(FRANKFURT) - A sharp contraction in eurozone lending even as the overall amount of money swirling around the 16-nation bloc edged higher underscored concern over the strength of a European recovery on Thursday.

Loans to the private sector declined by 0.6 percent, increasing the pace of a 0.1 percent decrease seen in December, European Central Bank data showed.

"The eurozone recovery is clearly struggling for momentum," said Howard Archer, chief European economist at research group IHS Global Insight.

That view was reinforced by the latest European Union survey of business and consumer sentiment, which showed the eurozone shifting into reverse following a 10-month rebound in confidence.

Along with fears over Greek debts and growth figures that were in many cases flat or negative for the fourth quarter of last year, the latest data appear to confirm a trend towards economic stagnation across the continent.

The ECB's M3 money supply indicator, which measures cash, deposits and some other financial items, increased by 0.1 percent in January meanwhile, partially reversing a decline of 0.3 percent in December, the central bank said.

The M3 figure might have been distorted by monetary policies that favour shifting funds into certain instruments such as bonds however, while some economists said the lending data was typical of periods that follow recessions.

Lending and money supply data illustrate consumer demand and economic activity in general.

Falling figures point to lower demand, which normally means inflation will subside and allow the ECB to cut interest rates.

Its main rate is already at a record low of one percent however, and is expected to stay there for most, if not all, of this year.

A breakdown of the data showed that while loans to households pursued a modest upward trend, credit to non-financial corporations fell again, to show a decrease of 2.7 percent compared with January 2009.

Companies have reduced their demand for credit owing to the global slowdown, but economists warn that firms may find it harder to get loans now, in part because their results could begin to reflect effects of the slowdown, making banks more wary of lending to them.

Banks are also now straightening out their own accounts following excessive lending that led to the financial crisis, even as governments and central banks urge them to make sure the overall economy has the credit it needs to function smoothly

Against that backdrop, the ECB and other central banks will probably only withdraw emergency supplies of cash to financial markets very slowly.

The latest figures "reinforce the case for the ECB to tread very lightly in gradually withdrawing its emergency liquidity measures, and to keep interest rates down at 1.0 percent" until at least late 2010, Archer said.

Michael Schuber, an economist at Germany's Commerzbank, added: "As the ECB fears that limited credit supply could stand in the way of the recovery, the bank is unlikely to change track as long as there are no clear signs of a turnaround in loan momentum."

25/02/2010 European Central Bank statistical press release: Monetary developments in the euro area,  94 kB