Borrowers increasingly depend on credit for their daily expenses

Shift in Spending Habits: Consumers Embrace Credit for Purchases as Businesses Rein in Investments

Borrowers increasingly depend on credit loans for their purchases - Borrowers increasingly depend on credit for their daily expenses

When it comes to buying big-ticket items like cars, furniture, or computers, German consumers are leaning heavily on credit. In 2024, specialized banks handed out a whopping 57 billion euros in new consumer credit, a substantial bump of 8.1% compared to the previous year when demand took a nosedive due to skyrocketing prices.

But the party's not all rosy for business investment financing. These banks reported a noticeable drop, providing only 10.8 billion euros for machinery, vehicles, or special equipment – a 3.4% decrease from the previous year. Many businesses are reluctant to invest due to the economic lull.

Overall, the 47 association members of these banks doled out a total of 133 billion euros in new loans in 2024, an enviable increase of 4.4% compared to the previous year. By the end of 2024, these institutions had lent a whopping 202.3 billion euros to consumers and businesses.

Tightening the Purse Strings - Business Financing Challenges

So, what's causing the decline in business investment financing? Several factors played a role:

1. Tightened external financing: Non-financial corporations experienced a significant contraction in external financing, bringing it down to €22 billion in Q4 2024 from €58 billion in Q3. This dip was mainly due to a decrease in loan-based financing and foreign borrowing. With traditional lending channels constricting, trade credits (€21 billion) started to play a significant role as the primary liability driver [1].
2. Macroeconomic pressures: Persistent energy costs from the Ukraine war, a decrease in Chinese demand, and new U.S. tariffs (e.g., 25% on German cars) eroded export competitiveness and corporate confidence. Firms were likely hesitant to make hefty investments due to the threat of additional tariffs [2].
3. Focus on debt sustainability: The debt ratio for non-financial corporations dropped to 67.3% due to stagnant liabilities (€11.6 trillion), even as the nominal GDP grew. This conservative approach demonstrates caution against overleveraging [1].

Credit Cravings - Consumer Credit Growth Drivers

While we don't have specific consumer credit data available, it's likely that several contextual factors contributed to this trend:- Financial resilience: Real returns for households remained positive (~2%) despite market volatility, thanks to investment fund and equity holdings [1][5].- Pent-up demand: The stabilization of economic sentiment post-recession may have boosted borrowing for durable goods.- Funding shifts: Pension reforms and higher funding ratios (82% in 2024) might have inadvertently enhanced household liquidity through defined contribution plan growth [5].

A Divergent Economy

In a peculiar twist, businesses prioritized deleveraging amid global trade uncertainties, while consumers – buoyed by labor market stability and financial asset growth [1][5] – turned to credit for consumption. Policy apprehension, particularly around U.S.-EU trade relations under potential Trump tariff escalation [2], exacerbated this stark divergence in financial behavior.

1. Employment policies, aimed at fostering consumer confidence, might have indirectly contributed to the increasing reliance on credit for big-ticket purchases in Germany, as consumers sought alternatives to decreasing business investment financing.
2. With businesses focusing on debt sustainability and deleveraging, especially during a time of global trade uncertainties, employment policies could potentially play a role in encouraging employment growth and personal financial stability, thereby driving consumer credit growth.
3. In the light of the surprising dispersion between business and consumer financial behaviors, it would be worthwhile for policymakers to evaluate and adjust both community and employment policies to address these divergent trends and prevent any potential negative impact on the overall economy.
4. As specialized finance institutions continue to pour large amounts of euros into consumer credit, employment policies should be fine-tuned to ensure that this influx of funds is being used responsibly and isn't leading to unsustainable consumer debt levels.
5. In order to encourage businesses to invest more, policymakers should consider implementing measures that ease the finance constraints faced by non-financial corporations, such as providing incentives for smaller businesses to access credit, or offering tax breaks for strategic investments. This could, in turn, help foster a healthier investment environment and strengthen economic growth.

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