January 2025 KfW Market Credit Outlook
Business lending is on the rise once again after experiencing a low point in the fall of 2023. Following a two-year period of stagnation, new lending to businesses is showing signs of growth. Research conducted by KfW indicates that new lending activity increased by 1.6% in the third quarter of 2024 compared to the same period in the previous year. This growth can be attributed to a combination of falling interest rates and a base effect resulting from the low lending volume in the previous year’s third quarter.
Despite this positive development, several factors are hindering the full recovery of lending activity. The subdued economic environment, uncertainty surrounding trade policies, and businesses’ cautious approach to investments have all contributed to slowing down the growth in lending activity during the third quarter. These challenges are expected to persist in the near future, although falling interest rates are anticipated to help stabilize credit growth.
Looking ahead, it is projected that credit growth reached approximately 2.6% in the fourth quarter of 2024, with a slight decline to around 2% expected in the first quarter of 2025. However, the direction of US trade policy and potential countermeasures pose a significant downside risk to this forecast. The uncertain nature of these external factors could impact the trajectory of credit growth in the coming months.
In summary, while there are positive signs of recovery in business lending, the road ahead remains uncertain. The growth in lending activity is showing promising trends, but challenges such as economic uncertainties and trade policy risks continue to loom large. As businesses navigate these complexities, the role of falling interest rates in supporting credit growth will be crucial. By closely monitoring external developments and adapting to changing market conditions, both businesses and financial institutions can work towards sustaining the upward momentum in lending activity.
