Three promises of spring stirred by thaw in credit

A thawing of credit conditions is set to play an increasingly important role in the eurozone's economic recovery.

Wednesday's GDP figure for the first quarter is set to mark a return to more impressive levels of economic expansion after years of anaemic growth. In the coming months, banks' contribution to the region's nascent return to economic health will be vital.

The fillip in lending conditions comes on the back of aggressive monetary easing by the European Central Bank and the conclusion of supervisors' health check of the region's banking system. But the pace of the improvement in credit conditions has surprised insiders at the central bank, who did not expect measures such as the €1.1trn quantitative easing package to have such an immediate impact.

Here are three pieces of data to watch to see if the trend continues in the months ahead.

Uptick in business lending

Broken credit markets have held back growth by leaving smaller businesses starved of finance.

A series of rate cuts by monetary policy makers, which left the ECB's main borrowing rate at 0.05 per cent, had little impact because the bar for borrowing was set so high by lenders. With confidence weak, many businesses were also reluctant to borrow.

March saw the first rise in loans to the private sector for three years.

Problems remain. Lending conditions measured through ECB surveys are still very tight by historical standards. The growth witnessed in the year to March, of 0.1 per cent, is minute compared with the double-digit levels witnessed in 2007 and the first half of 2008.

But most ECB-watchers expect business lending to jump in the coming quarters. Even if it stays below the levels seen before the crisis in the longer term, that is not necessarily a bad thing. Dirk Schumacher, an economist at Goldman Sachs, said: "Not all the lending that happened before the crisis was good. There were bubbles in some places."

Plunge in Spanish and Italian rates

The height of the eurozone crisis was characterised by a gulf in the yields on government debt for countries at the region's core, such as Germany, compared to those in the periphery, such as Spain and Italy.

The vast disparity between the low borrowing costs available to the core and the high rates charged to the periphery applied not only to governments. What ECB president Mario Draghi dubbed "financial fragmentation" affected households and businesses too.

That fragmentation is now in reverse.

Before the eurozone's twin sovereign debt and banking crises, borrowing costs charged by banks in Spain, Italy and Germany were about the same. That is unlikely to be repeated any time soon.

But, while some spread is set to remain, the difference between the average borrowing costs for German companies and their Spanish counterparts has fallen dramatically over the past couple of years from 120 basis points to 50 basis points. In Italy, the spread has narrowed from 160 basis points in April 2013 to 80 basis points.

In Spain, the trend highlights the success of efforts to clean up the country's banking system. In Italy, more substantial problems remain, such as the high rates of non-performing loans saddling banks' balance sheets.

Broad money booms

Before the era of inflation targeting, central bankers relied on measures of so-called "broad money" - cash, deposits and short-term securities - to set interest rates.

Monetary aggregates are notoriously difficult to interpret, which is why policy makers' focus on them has waned since the early 1980s. But the ECB still keeps a close eye on a measure known as M3.

Policy makers look at M3 because it is seen as a bellwether for what will happen to price pressures in the years ahead. In the words of Milton Friedman, a US economist and one of the doyennes of modern central banking theory, inflation is "always and everywhere a monetary phenomenon".

The fact that M3 in March shot up at a rate above the psychologically significant level of 4.5 per cent for the first time since before the financial crisis does not augur an era of high inflation.

But more rises of this magnitude in the months ahead will count as a big plus for a central bank spooked by the threat of a serious bout of deflation.

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