Euro area economy continues to show resilience, but the lending channel is not working

The flow of data over the past two weeks has proven better than expected. The euro area continues to show resilience, helped by robust consumption (due to stronger real disposable income and improving labour markets) and a continued recovery in exports to the US. Hard data (industrial output, retail sales, net trade) point to a solid recovery in Q3, close to 0.4-0.5% qoq. The job markets recovery has continued everywhere, notably in Germany and France. 

Mirroring the PMIs, the EC economic sentiment index printed at its highest level in October since June 2011, suggesting that the euro area economy will not slow down in Q4 15. October flash HICP for Germany and Spain are signs that the turnout in headline inflation is starting to materialize. All these developments would suggest that there is nothing inevitable about further ECB easing. Having said that, the big news this week came from the weakness in credit dynamics that was more pronounced than expected. 

Credit to the private sector slowed down from 0.8% to 0.4% yoy in September. The recovery in credit to the private sector remains sluggish and mainly comes from loans for house purchases in Germany and France, whereas the flow of loans to NFC has been stalling since last spring. This helps explain the weak demand for the latest TLTRO (€15.6). All this suggests that despite lower financial fragmentation, loan demand from NFC for investments remains week. The ECB is thus likely to revise its optimistic views of a sizeable recovery in investments over the coming years. 

"We expect a sluggish recovery in investments (SGe 1.7% for 2015, 1.4% for 2016), mainly financed by corporate cash rather than by leveraging", notes Societe Generale.