2024-01-10 14:11:29
Published on Jan 10, 2024 at 3:11 p.m.
Moderately optimistic. Economists are, on average, convinced that growth in 2024 in the euro zone will be more or less equivalent to that of the previous year. Perhaps it will even be a little better thanks to the rapid decline in inflation which will restore some purchasing power to households and might push the European Central Bank (ECB) to lower its interest rates.
In this half-hearted scenario, however, there are risks. Among them, that of a stronger than expected effect of past interest rate increases on the financial health of companies.
Decrease in the volume of credits
First of all, “banks are tightening credit conditions in the euro zone, moreover, the volume of credits has contracted slightly over a year,” underlines Florence Pisani, economist at Candriam. Indeed, the interest rates paid by European companies on the bond markets were close to 5% in December while they barely reached 1.5% two years ago. And loans granted by banks to businesses are down sharply over one year in Spain, Italy, Greece and Portugal.
The last time bank credit volume slowed so quickly was in 2008, during the financial crisis. The most weakened companies today have difficulty finding financing. Moreover, “the share of credit in GDP is declining,” notes Ariel Emirian, economist at Société Générale.
And at the same time, “the debt burden is increasing for many companies needing to renew their debt. And as demand will remain generally weak in the euro zone in 2024, there is no reason for companies to continue to invest. Their investment will stop progressing in 2024,” predicts Florence Pisani.
Towards an increase in failures
Then, following these rate increases, many expect business insolvencies to increase in 2024. “Default rates will automatically increase,” according to Michala Marcussen, chief economist at Société Générale. The number of business failures in the eurozone has already risen above its pre-Covid level since mid-2022.
For the moment, “it is mainly small companies which have gone bankrupt”, the large groups having kept their debt at the 2018-1019 level, however, underline the economists at Allianz Trade. But “companies in the real estate, construction, utilities and renewable energy sectors will face significant headwinds,” they warn. In short, for Bruno Cavalier, the chief economist of the Oddo BHF bank, “the full effect of the rate shock is coming” for businesses.
The risk is that companies, faced with sluggish demand, significant wage increases and rising interest charges, opt for job reductions in order to defend their margins. There, a recession mechanism would be put in place. But economists are not counting on such a scenario. One thing is certain, in a fairly depressed economic environment, certain European companies will suffer.
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