Maybe the world economy won’t be “running on one engine” for too long after all.
Figures out Tuesday show banks in both China and the Eurozone are increasing their lending in response to easier policy by their respective central banks, even as the recovery in the U.S. shows signs of faltering as the Federal Reserve grinds slowly towards its first interest rate increase in nearly a decade.
That’s good news for those concerned by China’s ability to manage its deflating housing bubble (and the excess industrial kit it has built to fuel the boom), and worried by the threat of deflation and ‘secular stagnation’ in Europe.
But, as you might imagine, there are very different forces at play in the two regions.
In the Eurozone, ultra-low interest rates created by the European Central Bank’s quantitative easing policy are creating more and more demand for loans from both businesses and households, while in China, banks are now more able to lend after the People’s Bank of China cut requirements on the amount of liquidity they have to hold back in reserve (they’re also profiting from two interest rate cuts).
Those two factors appear to have encouraged borrowers to move back into the regulated credit market and out of a nebulous “shadow banking” sector where the threat of real estate-linked defaults is making finance more expensive. (Read more here about how Beijing is coping with the massive build-up in debts at regional level.)
The People’s Bank of China said new loans from the official banking sector rose by rose by 1.18 trillion renminbi ($190 billion) last month, up a touch from RMB1.02 trillion in February and over 10% higher than expectations. But data on aggregate financing, which includes the shadow banking sector, implied that new loans there hadn’t risen at all. The share of the shadow banking in overall loans fell to 8.4%, the lowest level in six years.
Analysts at ANZ said the overall picture is still “lukewarm”, despite the cuts in rates and reserve requirements, and said the PBoC still needs to do more to head off the risk of deflation.
In Europe, meanwhile, the ECB’s latest quarterly survey of the banking sector showed a big rise in the balance of banks who expect demand for credit from both companies and households to rise this spring. Although the ECB has been busy opening the spigots for the last few months, there had been little sign of either businesses or households actually wanting to borrow because they didn’t have enough confidence, either in their own outlook or the outlook for their economy in general.
Figures out elsewhere in Europe also made for some welcome reading ahead of the ECB’s council meeting Wednesday. Industrial production in the Eurozone rose by 1.1% in February, instead of the 0.3% decline expected, while the inflation rate in Spain ticked up for the second month in a row, strengthening hopes that the risk of deflation may be receding.
Analysts at Credit Suisse said the output figures suggest that the Eurozone economy may have grown as much as 0.7% in the first quarter, which would make it the Eurozone’s best quarter since 2011.
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