World Economy

Lending Pushes EU on Recovery Track

Lending Pushes EU on Recovery TrackLending Pushes EU on Recovery Track

Lending growth to eurozone companies and households picked up last month, suggesting the bloc's slow but steady economic recovery remains on track and easing pressure on the European Central Bank to boost monetary stimulus further.

Pressure has been mounting on the ECB to provide further stimulus as Britain's decision to leave the European Union is expected to dent growth, but solid economic data since the referendum has supported the bank's cautious approach, Reuters reported.

Better than expected Purchasing Managers' Index data this week, an only minor drop in consumer confidence, and supportive data from the bloc's periphery indicate any near-term hit from Brexit will be small.

Lending growth to households and companies both picked up to 1.7% in June from 1.6% in May, with figures also benefiting from a broad upward revision of historical corporate lending numbers on a revised methodology.

Hoping to revive borrowing and spending, the ECB has been easing policy for years, cutting rates deep into negative territory, offering ultra cheap loans and buying assets worth €80 billion per month.

The cheap cash has been slowly making its way into the real economy, increasing borrowing and investment. But it has yet to revive consumer price growth, the ECB's ultimate goal, with inflation hovering either side of zero for over a year, well short of the bank's target of close to but below 2%.

But the ECB has kept a steady policy course since March, when it cut interest rates and expanded its asset-purchase program.

Italy's Problems

About a month on from Britain's vote to leave the European Union, there's little evidence that economic activity across the continent has been derailed yet, AP reported.

That's some reassurance for the 19-country eurozone as it faces a host of other problems, many of which relate to Italy, the bloc's third-largest economy. The country has to shore up its banks—and will get some idea Friday of the scale of the problem when regulators publish the results of EU-wide bank stress tests.

Separate figures Friday will also show how the eurozone economy was faring in the run-up to the British vote. Analysts estimate that the quarterly growth rate halved to 0.3% in the second quarter compared with the first for a variety of reasons, including the pick-up in the price of oil, concerns over a slowdown in China and uncertainty ahead of the British referendum on June 23.

Surveys of business activity, such as the Ifo index of German business confidence, have shown resilience.

"Europe already appears to have moved on," said James Nixon, chief European economist at Oxford Economics.

Nixon said "the more immediate challenge" for European policymakers is the constitutional referendum in Italy expected this fall, "where the government currently faces a good chance of succumbing to the same sense of populist disaffection that prompted Brexit."

Duetsche Bank Shows 98% Loss

German giant Deutsche Bank shocked markets with a dismal trading update Wednesday morning, adding to fears the economic outlook for the eurozone has darkened.

The German lender said net income fell 98% to €20 million ($22 million) from €818 million a year earlier, while net revenue dropped 20% to €7.4 billion. The bank beat average net-income forecasts of analysts, whose expectations had ranged widely from a quarterly loss of more than €1 billion to a profit of more than €500 million, MarketWatch reported.

Deutsche Bank’s shares have fallen 43% this year, compared with a 27% decline on the Stoxx Europe 600 banks index. Investors have sold European bank shares since the UK voted June 23 to leave the European Union.

Chief executive John Cryan Wednesday warned the poor outlook could lead to even more jobs cuts and cost cutting than was already underway.

The firm is one of Germany's largest lenders and had already lost around 40% of its value this year amid investor concerns, which include the current low rate interest and a struggling European economy.