Loans To Euro-Zone Businesses Fall 1.6% in June-ECB

By Brian Blackstone

FRANKFURT--Loans to euro-zone businesses fell sharply in June, the European Central Bank said Thursday, suggesting that any recovery in the region's economy is likely to be subdued.

Loans to the private sector fell 1.6% in June from the same month a year earlier, according to the ECB, compared with a 1.1% drop in May. Loans to households were unchanged from a year earlier, while credit to non-financial businesses slid 3.2% from June 2012.

"Banks believe the economic situation and outlook in many euro-zone countries still provides an uncertain and risky backdrop in which to lend," said Howard Archer, an economist at IHS Global Insight.

The broad gauge of money supply, M3, rose 2.3% from last year, according to the ECB, down from May's annual growth rate of 2.9% and below analyst forecasts of a 3% rise. The ECB's target rate for M3 growth is 4.5%. The weakness in M3 suggests that inflationary pressures remain subdued, giving the ECB room to reduce interest rates further if needed, Mr. Archer said.

The report comes amid signs that the euro-zone economy has started to find its footing after 18-straight months of contraction through to the first quarter. Many economists expect next month's report on second quarter gross domestic product to post a flat reading, with some analysts predicting for a slight gain.

Germany's economy, which accounts for around one-third of euro zone GDP, is expected to have rebounded last quarter with growth around 2% at an annualized rate. Recent estimates from the Bank of France suggest slight growth in the bloc's second-biggest economy, and Spain's recession appears to have eased.

A closely-watched survey of purchasing managers in the euro zone, released on Wednesday, signaled an expansion of business activity in July for the first time in 18 months.

But a robust, job-creating recovery remains distant until banks, particularly in southern Europe, extend more credit to businesses and consumers to finance new spending.

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