European Loan Growth Was Slowest on Record in August

By Jana Randow and Gabi Thesing

Sept. 25 (Bloomberg) -- Loans to households and companies in Europe grew at the slowest pace on record in August as the economy struggled to shake off its worst recession since World War II.

Loans to the private sector rose 0.1 percent from a year earlier, the slowest growth since records began in 1991, after increasing an annual 0.7 percent in July, the European Central Bank said today. On the month, loans fell 0.1 percent. M3 money- supply growth, which the ECB uses as a gauge of future inflation, slowed to 2.5 percent in August from 3 percent in July.

The global recession has made banks reluctant to lend and also eroded demand for debt. While the economy of the 16 nations sharing the euro may resume expansion in the current quarter, growth is likely to remain muted unless credit flows improve and companies and households increase spending. The ECB has cut its benchmark interest rate to a record low of 1 percent and is flooding banks with cash in an effort to revive lending.

“Today’s data justifies the ECB’s extremely cautious stance once again,” said Michael Schubert, an economist at Commerzbank AG in Frankfurt. “The risk of a credit crunch has not disappeared even with the economy recovering, quite the contrary. With the new stronger regulation coming out of the G- 20, banks will be even more careful about lending.”

Capital Requirements

President Barack Obama and other Group of 20 leaders meeting in Pittsburgh today are uniting behind a plan to force banks to tie compensation more closely to risk and tighten capital requirements, U.S. officials said.

The German and French economies unexpectedly expanded in the second quarter and Europe’s manufacturing and service industries grew for a second month in September.

M1, which captures the most liquid form of money in the economy such as cash and overnight deposits, grew 13.6 percent in August from a year earlier, the ECB said, up from an annual increase of 12.1 percent in July. Accelerating M1 growth indicates more money is available for spending and investment which, when enacted, spurs economic growth.

To contact the reporter on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net.