Both the United States and Europe are experiencing a significant decline in demand for bank loans, raising concerns about the state of the economy. This comes as the Federal Reserve has just announced that it no longer expects a recession. The decrease in demand for bank loans is a worrying sign for businesses and financial institutions alike.
A recent tweet highlighted the worrisome trend, stating that corporate demand for bank loans has fallen to its lowest level since 2008. In fact, there is almost half as much demand now as there was in 2020 when the economy was completely locked down due to the COVID-19 pandemic. Both the US and Europe have witnessed substantial drops in demand for business loans, indicating a broader economic slowdown.
The Federal Reserve’s Senior Loan Officer Opinion Survey on Bank Lending Practices confirms this decline in demand. The survey found that banks have tightened lending standards and reported weaker demand for commercial and industrial (C&I) loans across all business sizes. Furthermore, banks reported tighter standards and decreased demand for all categories of commercial real estate (CRE) loans. The survey also revealed that lending standards for residential real estate (RRE) loans have tightened, particularly for loans that are not government-sponsored enterprise (GSE)-eligible and government loans. Demand for all RRE loan categories has weakened as well. In addition, banks reported tighter standards and reduced demand for home equity lines of credit (HELOCs). Consumer loan categories also experienced tighter standards, with weakened demand for auto and other consumer loans.
The decline in demand for business loans is reflected in measures of supply and demand for commercial and industrial loans, as well as commercial real estate loans. These measures indicate a significant decrease in both supply and demand for loans in these sectors.
The reasons behind this decline in loan demand are multifaceted. The fear of a potential recession and the associated risk to profits has made companies more cautious about seeking loans for expansion. In response, banks have raised lending standards, which further exacerbates the slowdown in loan demand. This cycle of reduced loan demand and tighter lending standards can create a negative feedback loop that hampers economic growth.
Although the Inflation Reduction Act has provided some temporary relief by offering substantial subsidies, these measures are not sustainable in the long term. As the impact of these subsidies wears off, the decline in loan demand becomes more pronounced.
This sharp decline in loan demand does not align with the widely-held belief in a “soft landing” for the economy. It raises concerns about the state of the global economy and its ability to continue growing. Further analysis of China’s collapsing exports and imports may provide additional insights into the overall health of the global economy.
In conclusion, the significant drop in demand for bank loans in both the US and Europe is a cause for concern. This decline, coupled with tighter lending standards, raises questions about the health of the economy and the potential for a recession. It remains to be seen how policymakers will address this issue and stimulate loan demand to reignite economic growth.