Economic Outlook: Euro Zone Lending and German Business Sentiment

(Reuters) – Euro zone bank lending rebounded more in September, and German business sentiment has improved more than expected this month, bolstering the view that the euro zone economy has bottomed out, even if there is no rapid recovery in sight.

The 20-nation bloc's economy has expanded at the slowest possible pace for most of the past two years and policymakers have repeatedly pushed out their expectations for a recovery, raising some doubts about whether it is coming at all.

> "Both reports are encouraging signs rather than signals of stronger turns," JPMorgan economist Greg Fuzesi said.

Lending to euro zone companies grew by 1.1% in September, its highest rate since mid-2023, while lending to households increased by 0.7%, the highest level since last October, according to the European Central Bank (ECB).

Absolute lending volumes were relatively modest, however, with loans to households rising by 9 billion euros and to firms by 19 billion euros, the ECB noted.

A recent bank lending survey suggested that volumes could rise further, especially for household mortgages, as ECB rates are already well below their peak. Further rate cuts are fully priced in, with the key rate projected to bottom out at below 2%, significantly less than half its highest rate earlier this year.

Meanwhile, German business morale has improved more than expected in October, as shown by an Ifo Institute survey, providing some respite for an economy that will likely contract in the second half of this year.

The Ifo Institute reported that its business climate index for the euro zone's largest economy increased to 86.5 in October from 85.4 the previous month, surpassing the 85.6 reading forecasted by analysts in a Reuters poll.

> "Today's recovery in the Ifo business climate speaks against a deep recession," stated Commerzbank economist Joerg Kraemer. "The more likely scenario remains stagnation in the winter half-year followed by an anaemic recovery from spring onwards."

A more robust recovery is unlikely, as the German government has not taken decisive action against the multi-year erosion in competitiveness, Kraemer added.

In other data, the ECB's M3 measure of money supply for the euro zone, seen by some as an indicator for future economic growth, expanded by 3.2%, a level last reached in December 2022, beating expectations of 3.0% seen in a Reuters poll.