Despite recent volatility in global equity markets the Eurozone’s economic recovery has remained on track in 2015. This has been largely driven by stronger exports, and consumer spending, with support from renewed growth in the flow of new lending to corporates. The outlook remains positive, with corporate lending and consumer credit forecast to strengthen in 2016, helping to boost the stock of lending to the economy by more than 3% for the first time in eight years. This should underpin a further Eurozone economic recovery according to EY’s Eurozone Outlook for Financial Services (EOFS).
After four consecutive years of contraction, we expect renewed positive growth in consumer credit, with the stock of lending expanding by 1.9% in 2015 and by 3.1% in 2016. This will support a recovery in consumer spending, which is forecast to grow by 1.7% in 2015, the highest rate of expansion since 2007, with continued strong momentum carrying into next year.
Low energy prices, the weaker euro and faster growth in the UK and US economies are also supporting business confidence and corporate lending. After contracting by 1.7% in 2014 – a third consecutive year of contraction – EOFS expects the stock of corporate loans in the Eurozone to stabilize this year, growing by 0.5%, before expanding by 3.8% in 2016 as the economic recovery broadens to investment.
Andy Baldwin, EY Financial Services Leader for Europe, the Middle East, India and Africa (EMEIA), says:
“While larger corporates continue to pay off bank debt, new lending to business looks more encouraging than it has for a long time. It’s the first year new loans to business have grown across all markets since 2012 and the cost of borrowing is also falling, particularly in the periphery economies, which should unlock some demand for lending and encourage investment and growth in the wider economy.”
The average cost of borrowing for businesses has fallen significantly this year, with rates in Spain having declined from 3.5% on average in 2014 to 2.7% this year, while rates in Italy have fallen from 3.1% to 2.2% over the same period. Although the compression of borrowing costs in Germany and France has been less marked, average rates have now fallen below 2%.
Spain, Germany, France and Italy all expected to see business lending growth
Both Spain and Italy have witnessed strong gains in new lending to firms in recent months, which has been supported by the targeted longer-term refinancing operations (TLTRO). But the total stock of loans continues to fall as debt repayments outweigh new loans.
Flows are likely to remain positive in the coming quarters, reflecting the improving economic backdrop and more positive bank sentiment, as well as supportive European Central Bank (ECB) actions (quantitative easing and TLTROs).
The German banking sector appears relatively robust and well-placed to respond to the expected pick up in loan demand this year as the economic recovery gathers momentum. Business loans are forecast to rise by 1.6% in 2015, with growth picking up to an expected 4.4% in 2016, pushing the stock of business lending to €1,370b by the end of 2016.
France has had a more difficult start to the year and EOFS’ expectation for growth in corporate loans has been revised to just 0.8% for 2015 as demand for loans from the non-financial corporate sector has fallen back. But, with business sentiment still robust, this is expected to be only a temporary pause in activity. Growth in corporate loans should therefore pick up to 3.6% in 2016, in line with the projected upturn in business investment.
The Italian banking sector remains hampered by high and rising non-performing loans, but these are finally forecast to peak this year at 16.3% of total loans. This should facilitate a gradual recovery in the stock of corporate loans, with positive growth of 2.5% forecast for 2016 and 4.2% in 2017.
Tom Rogers, Senior Economic Adviser to the EOFS, says: “The ECB’s lending surveys have shown a continued easing of credit conditions in the region and accelerating demand for loans. The improvement has been fairly broad-based, although Spain and Italy stand out in terms of expectations of strengthening corporate loan demand due to improved business confidence.
“With credit conditions easing and bond yields expected to gradually rise from next year, we expect the pace of disintermediation to slow and for direct bank lending to rise more strongly.”
AUM growth to remain healthy, particularly for equity and multi asset funds
EOFS expects that some of the recent declines in equity prices will be recouped by the year end. Recent global equity price volatility, driven by fears over the Chinese economy, has impacted estimated 2015 AUM growth for Eurozone asset managers, causing EOFS to revise down its forecast by 4% (from 14% to 9.7%).
Against this background, total AUM in the Eurozone are predicted to rise by a healthy 9.7% in 2015, following 16.8% growth in the previous year. Equity AUM across the Eurozone are expected to expand by 12.1% in 2015 and 10.8% in 2016, reflecting investors’ renewed appetite for yield in a low rate environment. Multi-asset strategies remain a key driver of inflows into Eurozone funds, reflecting a focus by both retail and institutional investors on diversified income-generating assets (a trend amplified by aging populations). EOFS expects these fund types to continue to outperform the broader market, with growth in AUM of 23.2% in 2015.
Growth in Italian and Dutch AUM is expected to be particularly strong in 2015, pushing total AUM in these markets to €479b and €81b by year-end respectively.
AUM in equity and multi-asset funds comes at the expense of bonds, with EOFS anticipating the share of AUM in bond funds to fall from 29% in 2014 to 25% by 2019.
Roy Stockell, EY Wealth Asset Management Leader for EMEIA, says: “Some observers have interpreted the volatility and equity price declines over the summer as the first signs of a renewed crisis in global markets, but the reality is much less dramatic. What is happening is more a process of correction and rebalancing than a slide back toward 2008-style turmoil. The fact remains that China’s markets are still ahead of where they were at the start of the year, and, the correction in European markets is exactly that – a correction that was overdue.
“Going forward, continuing low interest rates in the Eurozone are likely to see an ongoing move from cash back into the markets in search of returns, reflecting a growing awareness that leaving assets in cash is not the route to long-term wealth creation. However, concerns remain – not least around future liquidity – as more illiquid investments become the best option for higher yields. Meanwhile, the continued importance of multi-asset strategies in Eurozone fund inflows reflects the desire to spread risk across different asset classes.”