Eurozone Credit - A Squeak of Life for Italy and Spain?

Over the last few weeks, a crop of data from Italy and Spain has surprised consensus and broken trend positively: last week that included Spanish mortgage markets and Italian consumer confidence; before that we'd had surprises from Italy's industrial output, sales and orders surprised, and its current account deficit was small enough to break trend. In addition, Spain's exports are beginning to pick up sequentially once again.  Italy and Spain are not the most obvious places to look for signs of commercial life in the Eurozone. So what is happening?

The headlines of the Eurozone Feb money data were unremarkable – M3 growth of 1.3% yoy was exactly as expected, and in any case is hardly striking when compared against a base of comparison which is rapidly becoming easier.  But it was nonetheless a strong figure, with the 0.2% mom rise 1.2SDs above historic seasonal trends.

This surprise sent me back to the Eurozone banking data, where  to my profound surprise, I also found signs of life – something I had discounted owing to this year's forthcoming ECB stress tests.  In particular, loans to the private sector, though they inched down 0.1% mom and were down 3.6% yoy, are now beginning to moderate the extremely negative trends of the last five years.  Thus although Feb's private sector loans fell marginally, this was fully 1.3SDs better than the average Feb fall of the last five years.  Nor is this a one-off, there have been gains vs trend in each of the last six months, leaving the 6m momentum at 0.7SDs above trend – this is the highest it has been since August 2011, and it is still rising sharply.

The problem is that the underlying trend is so sharply negative that even these new levels of outperformance will still leave overall lending contracting quite sharply this year.  If the outperformance of the last six months is maintained throughout the year, private lending lending will end up falling 2.9% in 2014, with loan book down Eu305bn. That's better than the 3.6%, or Eu395bn contraction of 2013, but still a fall. So what we have is simply a moderation of the pace of contraction, not a reversal – a second-derivative change, not yet a change in direction. 

But the Eurozone encumbrances an impossibly diverse set of economies, so we should expect the overall moderation of trend to incorporate substantially diverse credit trends.  Perhaps the overall modest improvement is hiding substantial improvement in individual economies? The first cut tells us that the improvement vs trend in lending to the private sector is found mainly in the Big Four economies of Germany, France, Italy and Spain, which account for just over two thirds of the Eurozone loan book. There the first break into positive momentum came in mid-2013,  with a sharp acceleration during four months to February. By February the 6m deflection above trend was running at 1.04SDs, and the loan book was contracting by 1.9% yoy. 

It's a different tale for the rest of the Eurozone, where the nadir of contracting lending came only in September 2013, and where the 6m trendline broke into positive territory only during February. For these economies the loan book was contracting 6.9% yoy in February. The improvement in current trends means little for them: loans fell 5.6% in 2013 and are likely to fall 5.4% again in 2014.  

Looking more closely at the Big Four:

• The biggest 6m deflection against trend by far is from Spain (1.2SDs). There, pace of decline of credit has been essentially held steady since June 2013. Even so, on current trends, it still seems likely the total loanbook will contract by a further 8.3% this year (vs 9.6%  in 2013). 
• The second largest recovery against trend is found in France, where in February the loan book for corporations and h'holds actually expanded by 0.9% yoy, and 0.6 Sds above trend. Again, however, the underlying trend is sufficiently grim to make any significant credit growth this year unlikely – current trends would suggest a growth of 0.4% (vs 0.8% in 2013). 
• By February German loan growth was running at 0.3% yoy, and the 6m momentum trendline was 0.3SDs above reasonably negative historic trends.  On current form, we can expect no loan growth in 2014 in Germany (vs 0.2% in 2013). 
• Finally, Italy's loan book was down 2.7% yoy and was only 0.2SDs above trend. However, interestingly, the improvement in current trends would cut that fall to just 0.2% yoy in 2014, which represents a modest recovery from the 4.1% yoy fall in 2013. 

A very rough summary, then, is that there is no significant loan growth in either Germany or France, and recent data gives no grounds for expecting any in 2014.  Recent data, however, gives us evidence that there is already a significant moderation of negative trends in Italy,  and that conditions in Spain, though grim, are no longer deteriorating.  Perhaps the fact that the Eurozone's credit vice is no longer intensifying its grip on these economies is allowing a squeak of commercial life.  Meanwhile, credit conditions remain essentially unchanged, and sharply negative for 'The Rest'.