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The coming European recession may be worse than 2008

Christine Lagarde, President of the European Central Bank, is facing a long summer. Credit: Getty

July 28, 2023 - 7:15am

The European statistics agency Eurostat has released its bank lending survey and the data does not look good. The survey tracks the credit conditions and amount of loan demand seen in the European banking system: as it is based on a survey of lenders, it is typically seen as a “forward-looking” indicator. That is, it picks up on trends before they emerge in the official data.

The release makes for grim reading. Credit supply across the board is tight, with banks reluctant to lend in the face of rising interest rates. Credit demand is poor, too, with Europeans reluctant to take out bank loans. But it is in the commercial sector that the picture looks particularly concerning: demand for loans among businesses is now at historic lows.

“Euro area firms’ net demand for loans decreased strongly in the second quarter of 2023,” the authors write, “dropping to an all-time low since the start of the survey in 2003.” This means that commercial loan demand is now lower than it was in the depths of the credit crunch of 2008-09, particularly worrying since high energy prices are currently putting pressure on European firms. This data is wholly consistent with the idea that Europe might be undergoing a profound deindustrialisation.

This may just be survey data, but it correlates clearly with the hard data typically released later by statistics agencies, enabling forecasts of future developments. The chart below shows the “soft” lending data together with the “hard” data of European fixed investment. It is not hard to see that the two are strongly correlated.

Looking at the forecast for European fixed investment, it implies that investment has fallen in Europe by around the same amount as in the recession of 2008-09. Since the business cycle is led by fixed capital investment, this data can also be used to forecast GDP growth in Europe. The chart below lays out GDP growth in Europe since 2003 together with this forecast.

The bank lending data implies that European economies are now deep in recession. It also suggests that this recession is even more violent than that of 2008-09. While the financial crisis started slowly before becoming gradually more severe, this forecast indicates that the present recession might start violently and then — well, who knows?

That said, there are other indications that Europe is not undergoing a recession. The unemployment rate, for example, is currently very low whereas in 2008-09, the last time bank lending survey numbers were so dire, it was rising rapidly. This leaves one of two possibilities. The first is that the lending data is contracting so rapidly that it is even more of a leading indicator than usual, implying that a very large recession is on the horizon in Europe, and it is only the bank lending survey data that is detecting it.

The other possibility is that this time is different, that the bank lending survey data no longer works to predict GDP growth. This would mean that something has gone seriously wrong in the commercial lending sector. On this reading, companies are contracting their lending as if the economy were in a major recession, all while the economy is still growing. The most obvious explanation here would be high energy prices.

It is not clear which of these alternatives is worse. But either way, the bank lending survey data demonstrates that the European economy is in a very tough spot.


Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics

philippilk

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Prashant Kotak
Prashant Kotak
10 months ago

“The coming European recession may be worse than 2008”

Ya think?
Why is it that economists are the very last people to see what’s been obvious to absolutely everyone else for at least a couple of years about what’s coming? Bailey at the BoE is another example. Why? Why is it *always* a surprise?

Andy Moore
Andy Moore
10 months ago
Reply to  Prashant Kotak

Why you ask; because the first thing a man will do for his ideals is lie.

Julian Farrows
Julian Farrows
10 months ago
Reply to  Andy Moore

Indeed. “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” ― Upton Sinclair

Julian Farrows
Julian Farrows
10 months ago
Reply to  Andy Moore

Indeed. “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” ― Upton Sinclair

Charles Stanhope
Charles Stanhope
10 months ago
Reply to  Prashant Kotak

The COVID dividend.
Why? “Because we’re worth it”!

Susan Grabston
Susan Grabston
10 months ago
Reply to  Prashant Kotak

It’s not called the dismal science for nothing. Too many PhD models, not enough common sense. Dominic Smith (SundayTimes) shared a very simple indicator decades ago which stuck with me: the skip count. Lots of skips, lots of activity. No skips, recession. Simples.

Tim Dilke
Tim Dilke
10 months ago
Reply to  Susan Grabston

To the number of skips add the number of scaffolders. Never seen so many men with poles in my neck of the wood, SW London, for a while.

Hugh Bryant
Hugh Bryant
10 months ago
Reply to  Susan Grabston

All those skips also represent the massive upward transfer of wealth through artificially inflated house prices that is invariably the establishments kneejerk response to recession.

Tim Dilke
Tim Dilke
10 months ago
Reply to  Susan Grabston

To the number of skips add the number of scaffolders. Never seen so many men with poles in my neck of the wood, SW London, for a while.

Hugh Bryant
Hugh Bryant
10 months ago
Reply to  Susan Grabston

All those skips also represent the massive upward transfer of wealth through artificially inflated house prices that is invariably the establishments kneejerk response to recession.

Andy Moore
Andy Moore
10 months ago
Reply to  Prashant Kotak

Why you ask; because the first thing a man will do for his ideals is lie.

Charles Stanhope
Charles Stanhope
10 months ago
Reply to  Prashant Kotak

The COVID dividend.
Why? “Because we’re worth it”!

Susan Grabston
Susan Grabston
10 months ago
Reply to  Prashant Kotak

It’s not called the dismal science for nothing. Too many PhD models, not enough common sense. Dominic Smith (SundayTimes) shared a very simple indicator decades ago which stuck with me: the skip count. Lots of skips, lots of activity. No skips, recession. Simples.

Prashant Kotak
Prashant Kotak
10 months ago

“The coming European recession may be worse than 2008”

Ya think?
Why is it that economists are the very last people to see what’s been obvious to absolutely everyone else for at least a couple of years about what’s coming? Bailey at the BoE is another example. Why? Why is it *always* a surprise?

Susan Grabston
Susan Grabston
10 months ago

I think of Europe as the global version of the “flyover states”, pincered between US and Asia. Its lack of resources, ageing demographics, and state of demoralisation does not bode well. Younger talent is starting to vote with its feet; wealth is egressing.

Susan Grabston
Susan Grabston
10 months ago

I think of Europe as the global version of the “flyover states”, pincered between US and Asia. Its lack of resources, ageing demographics, and state of demoralisation does not bode well. Younger talent is starting to vote with its feet; wealth is egressing.

Mike Downing
Mike Downing
10 months ago

Don’t worry; according to another post recently the UK’s future is even gloomier. So we can all compare each other’s fates and score relative brownie points as we race to the bottom. Just don’t expect our leaders to make any long-term hard decisions in the interests of the country. Gender self-id might do for a distraction or the climate apocalypse

Mike Downing
Mike Downing
10 months ago

Don’t worry; according to another post recently the UK’s future is even gloomier. So we can all compare each other’s fates and score relative brownie points as we race to the bottom. Just don’t expect our leaders to make any long-term hard decisions in the interests of the country. Gender self-id might do for a distraction or the climate apocalypse

R Wright
R Wright
10 months ago

“The unemployment rate, for example, is currently very low whereas in 2008-09, the last time bank lending survey numbers were so dire, it was rising rapidly. This leaves one of two possibilities.”
Both of your possibilities are less realistic to me than the idea that the metrics used to calculate unemployment figures are now entirely bogus, with millions of British people not included in the figures because they are not in work or seeking work. Things are far worse than you could possibly imagine.

Charles Stanhope
Charles Stanhope
10 months ago
Reply to  R Wright

Well said and spot on!

Ian Barton
Ian Barton
10 months ago
Reply to  R Wright

I believe that in the U.K. the increasing number of long-term sick people (genuine and otherwise) are not included in the unemployment figures.

Charles Stanhope
Charles Stanhope
10 months ago
Reply to  R Wright

Well said and spot on!

Ian Barton
Ian Barton
10 months ago
Reply to  R Wright

I believe that in the U.K. the increasing number of long-term sick people (genuine and otherwise) are not included in the unemployment figures.

R Wright
R Wright
10 months ago

“The unemployment rate, for example, is currently very low whereas in 2008-09, the last time bank lending survey numbers were so dire, it was rising rapidly. This leaves one of two possibilities.”
Both of your possibilities are less realistic to me than the idea that the metrics used to calculate unemployment figures are now entirely bogus, with millions of British people not included in the figures because they are not in work or seeking work. Things are far worse than you could possibly imagine.

Dumetrius
Dumetrius
10 months ago

I was in Luxembourg and Holland just before 2008 and it struck me how the EU was in a kind of ‘stasis’, trying to freeze time to hang onto what it had got.

Continued re-emphasis of an outlook and of ‘assets’ like cultural attractions which had lost their lustre.
They were just about keeping it all together.
When I visited again in 2011 it looked like their attitude was the same but looking at the inner cities and heritage areas, they were no longer in stasis.
Lots of bits of what had been kept together, had clearly detached and were either gone or withering away.

Last edited 10 months ago by Dumetrius
Julian Farrows
Julian Farrows
10 months ago
Reply to  Dumetrius

I’m a frequent visitor to the Netherlands, particularly Amsterdam. It seems to me that the local government wants to cater to rich, but boring, tourists. As a result, the city is changing gears to accommodate them, but at the expense of local Dutch citizens. Old pubs are being replaced by trendy breakfast bars or corporate coffee chains. Public buildings like universities and libraries are being converted into luxury brand hotels. Million euro apartments are being built while the city is suffering from a major affordable housing crisis. Unskilled immigrants are pouring into the capital contributing to crime and homelessness. In the meantime taxes are rising astronomically and politicians are accruing too much power by over-regulating the lives of the populace.
The Dutch government seems hopelessly out of touch and too powerless or cowardly to act in the best wishes of its people. Many of them are beholden to the World Economic Forum which compromises their integrity.

Charles Stanhope
Charles Stanhope
10 months ago
Reply to  Julian Farrows

The the ‘authorities’ should be reminded of what happened to the brothers De Witt.

ps, Jan de Baen portrayed it quite well, if they are in any doubt.

Last edited 10 months ago by Charles Stanhope
Charles Stanhope
Charles Stanhope
10 months ago
Reply to  Julian Farrows

The the ‘authorities’ should be reminded of what happened to the brothers De Witt.

ps, Jan de Baen portrayed it quite well, if they are in any doubt.

Last edited 10 months ago by Charles Stanhope
Julian Farrows
Julian Farrows
10 months ago
Reply to  Dumetrius

I’m a frequent visitor to the Netherlands, particularly Amsterdam. It seems to me that the local government wants to cater to rich, but boring, tourists. As a result, the city is changing gears to accommodate them, but at the expense of local Dutch citizens. Old pubs are being replaced by trendy breakfast bars or corporate coffee chains. Public buildings like universities and libraries are being converted into luxury brand hotels. Million euro apartments are being built while the city is suffering from a major affordable housing crisis. Unskilled immigrants are pouring into the capital contributing to crime and homelessness. In the meantime taxes are rising astronomically and politicians are accruing too much power by over-regulating the lives of the populace.
The Dutch government seems hopelessly out of touch and too powerless or cowardly to act in the best wishes of its people. Many of them are beholden to the World Economic Forum which compromises their integrity.

Dumetrius
Dumetrius
10 months ago

I was in Luxembourg and Holland just before 2008 and it struck me how the EU was in a kind of ‘stasis’, trying to freeze time to hang onto what it had got.

Continued re-emphasis of an outlook and of ‘assets’ like cultural attractions which had lost their lustre.
They were just about keeping it all together.
When I visited again in 2011 it looked like their attitude was the same but looking at the inner cities and heritage areas, they were no longer in stasis.
Lots of bits of what had been kept together, had clearly detached and were either gone or withering away.

Last edited 10 months ago by Dumetrius
Nicky Samengo-Turner
Nicky Samengo-Turner
10 months ago

Bank lending in Europe is much more controlled and restricted than in de-regulated UK: for example overdrafts are much more strictly controlled, and can in some cases be deemed criminal offences if exceeded, and are not unsecured.

Unsecured lending is almost unknown, and credit card use in, for example Germany is a fraction of that in UK. The free car loan/ lease is also virtually unknown, and the mortgage markets way smaller as many more Europeans rent rather than buy.

Sam M.
Sam M.
9 months ago

Well, at least they’re doing on thing right then.

Sam M.
Sam M.
9 months ago

Well, at least they’re doing on thing right then.

Nicky Samengo-Turner
Nicky Samengo-Turner
10 months ago

Bank lending in Europe is much more controlled and restricted than in de-regulated UK: for example overdrafts are much more strictly controlled, and can in some cases be deemed criminal offences if exceeded, and are not unsecured.

Unsecured lending is almost unknown, and credit card use in, for example Germany is a fraction of that in UK. The free car loan/ lease is also virtually unknown, and the mortgage markets way smaller as many more Europeans rent rather than buy.

Steve White
Steve White
10 months ago

EU pariah Victor Orban says that “Today ‘Western values’ mean three things, migration, LGBTQ, and war.” If he is right, and I think there is a lot of truth to what he is saying, then of course it’s all going to fail. Propping up a t**d and calling it gold will always fail and should fail. It seems however that economic falure might be the only hope of deplatforming the t**d that identifies as gold.

Last edited 10 months ago by Steve White
Steve White
Steve White
10 months ago

EU pariah Victor Orban says that “Today ‘Western values’ mean three things, migration, LGBTQ, and war.” If he is right, and I think there is a lot of truth to what he is saying, then of course it’s all going to fail. Propping up a t**d and calling it gold will always fail and should fail. It seems however that economic falure might be the only hope of deplatforming the t**d that identifies as gold.

Last edited 10 months ago by Steve White
Hugh Bryant
Hugh Bryant
10 months ago

It’s a feature, not a bug. Why do people not listen to or read the words of all the EU politicians since Monnet, who have quite openly proposed that the best antidote to democracy is permanent crisis?

Hugh Bryant
Hugh Bryant
10 months ago

It’s a feature, not a bug. Why do people not listen to or read the words of all the EU politicians since Monnet, who have quite openly proposed that the best antidote to democracy is permanent crisis?

John Riordan
John Riordan
9 months ago

Bad news for the UK if this is true. Recall that the main reason George Osborne didn’t get the economy into fiscal surplus by 2015 based on the 2010 manifesto plan was that the Eurozone recession in 2011 blew the UK economy off course.

And before anyone mentions Brexit – which I voted for and still support – the reality is that UK exports to the EU have not actually been seriously affected by Brexit, so the UK is still exposed to the danger of falling trade with the continent if it goes into recession.

Of course, Europe itself is hardly going to be concerned about the UK’s problems if it returns to the hell of the Euro’s defective monetary union. What’s different this time round, too, is Germany is not in the economically strong position it was during the previous difficulties. This time Germany entered recession before most other Eurozone nations, is facing an export crisis, an energy crisis and a geostrategic crisis. How will it respond to the inevitable Eurozone asymmetric stresses as and when they arise?

Charles Stanhope
Charles Stanhope
9 months ago
Reply to  John Riordan

“How will it respond to the inevitable Eurozone asymmetric stresses as and when they arise?”

BADLY, as always.

Charles Stanhope
Charles Stanhope
9 months ago
Reply to  John Riordan

“How will it respond to the inevitable Eurozone asymmetric stresses as and when they arise?”

BADLY, as always.

John Riordan
John Riordan
9 months ago

Bad news for the UK if this is true. Recall that the main reason George Osborne didn’t get the economy into fiscal surplus by 2015 based on the 2010 manifesto plan was that the Eurozone recession in 2011 blew the UK economy off course.

And before anyone mentions Brexit – which I voted for and still support – the reality is that UK exports to the EU have not actually been seriously affected by Brexit, so the UK is still exposed to the danger of falling trade with the continent if it goes into recession.

Of course, Europe itself is hardly going to be concerned about the UK’s problems if it returns to the hell of the Euro’s defective monetary union. What’s different this time round, too, is Germany is not in the economically strong position it was during the previous difficulties. This time Germany entered recession before most other Eurozone nations, is facing an export crisis, an energy crisis and a geostrategic crisis. How will it respond to the inevitable Eurozone asymmetric stresses as and when they arise?

Charles Stanhope
Charles Stanhope
10 months ago

Are Christine Lagarde and Frances Coppola sisters by any chance, does anyone know?

There seems to be a remarkable physical resemblance does there not?

Last edited 10 months ago by Charles Stanhope
Ian S
Ian S
10 months ago

I admit that her appearance may give some credence to David Icke’s theory of global rule by alien lizards

Ian S
Ian S
10 months ago

I admit that her appearance may give some credence to David Icke’s theory of global rule by alien lizards

Charles Stanhope
Charles Stanhope
10 months ago

Are Christine Lagarde and Frances Coppola sisters by any chance, does anyone know?

There seems to be a remarkable physical resemblance does there not?

Last edited 10 months ago by Charles Stanhope
Andrew Stoll
Andrew Stoll
9 months ago

“Go woke, go broke” .. is a common saying.
Just look around! Who is stoking all that nonsense? It’s not hard to work that out. Plus the demands and contributions to Europe by millions of culturally incompatible ‘migrants’ and their descendents.

Last edited 9 months ago by Andrew Stoll
Andrew Stoll
Andrew Stoll
9 months ago

“Go woke, go broke” .. is a common saying.
Just look around! Who is stoking all that nonsense? It’s not hard to work that out. Plus the demands and contributions to Europe by millions of culturally incompatible ‘migrants’ and their descendents.

Last edited 9 months ago by Andrew Stoll
Frank McCusker
Frank McCusker
10 months ago

You’ve been Pilked

Frank McCusker
Frank McCusker
10 months ago

You’ve been Pilked

john d rockemella
john d rockemella
9 months ago

It already is for nearly all people! GDP is a fake and artificially propped up number, anyone quoting GDP at this stage is a moron!