EY: Eurozone Credit Cycle Poised for Resurgence from 2025

The eurozone's credit cycle is turning a corner after a prolonged period of sluggish growth, according to the latest EY European Bank Lending Economic Forecast. 

Following two years of near-zero expansion, total bank lending in the region is projected to surge, reaching 3.1% growth in 2025 and accelerating to 4.2% in 2026. 

This marked upturn, from a mere 0.2% growth over 2023 and 2024, suggests a significant shift in the economic landscape of Europe's largest economies.

Credit recovery in Europe from 2025? 

The forecast, which draws on data from the European Banking Authority and national central banks of Germany, France, Spain and Italy – collectively representing over three-quarters of the eurozone's GDP – paints a picture of gradual but steady recovery. 

The eurozone economy is expected to grow by 0.8% this year, climbing to 1.4% in 2025, a notable improvement from the 0.5% growth recorded in 2023.

Omar Ali, EY Global Financial Services Leader, says: “The light at the end of the tunnel for Europe's major economies is getting brighter, and the prospect of growth is becoming more certain. The expected interest rate falls and slowly easing inflation next year will provide a less challenging operating environment and should boost borrowing activity.”

This resurgence in credit growth is anticipated across various lending categories, albeit at different rates. Mortgage lending, which accounts for nearly half of total lending in the eurozone, is forecast to stagnate at 0.0% growth in 2024 – the weakest performance in the forecast's history. 

However, a robust recovery is expected from 2025, with growth projected to reach 2.8%, followed by 4.1% in 2026.

The corporate lending sector is also poised for a comeback. After contracting by 0.1% in 2023, business lending is forecast to grow by 0.5% in 2024, before accelerating to 3.1% in 2025 and 4.2% in 2026. This trajectory reflects an improving economic outlook, with businesses expected to increase investment as borrowing costs ease and confidence returns.

Consumer credit, while slowing to 0.9% growth in 2024, is predicted to rebound to 3.0% in 2025 and 4.2% in 2026. This uptick is attributed to falling inflation, strengthening labour markets and rising consumer confidence across the eurozone.

Caveats to credit growth in eurozone

The forecast isn't without its caveats, however. Non-performing loans (NPLs) are expected to rise marginally, reaching 2.0% of total loans in 2024 and 2.3% in 2025 and 2026. While these figures represent an increase, they remain well below the peak of 8.4% seen during the eurozone debt crisis in 2013.

Nigel Moden, EY EMEIA Banking and Capital Markets Leader, notes: “For the first time in four years, lending is not expected to contract across any loan category in 2025, as GDP growth picks up across all of the major markets. Following years of low lending growth, Europe's banks are ready to play a key role in supporting consumers and businesses across the region.”

The recovery, however, is not uniform across the eurozone's largest economies. Germany, currently the most challenged G7 economy, is forecast to stagnate in 2024 with 0.0% GDP growth, before modest increases of 0.9% in 2025 and 1.6% in 2026. In contrast, France is expected to achieve 1.2% GDP growth in 2024, while Spain leads the pack with a projected 2.8% growth this year.

Italy, typically a low-growth economy, is anticipated to see 0.8% GDP growth in 2024, rising to 1.1% in 2025. However, its overall bank lending is forecast to contract by 1.7% in 2024 before returning to growth in subsequent years.

The varying growth rates across different lending categories and countries underscore the complex nature of the eurozone's economic recovery. Factors such as interest rate movements, inflation trends and sector-specific challenges continue to shape the environment. 

Nigel Moden concludes: “This forecast signals an opportunity for firms to rebalance corporate priorities. We expect to see even more focus on transformative technology, innovation and sustainability in 2025 and beyond.”

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