Corporate credit conditions are tightening, which is weighing on profits, according to a new report from the European Central Bank (ECB).
The central bank’s latest survey of firms, which was carried out between Nov. 19 and Dec. 15 last year, found that companies are seeing tighter financing conditions — including higher interest rates on bank loans, increased financing costs (fees and commissions), and more restrictive lending conditions.
At the same time, firms also reported an increase in demand for bank lending, up by 3% in the quarter, compared to 0% in the previous quarter — coupled with a decline in the perceived availability of bank funding.
“This increased the bank loan financing gap — an index capturing the difference between the need for and the availability of bank loans — to net 3%,” the ECB said.
And, it noted that firms also reported that the tighter lending conditions had a more negative impact on their own prospects, in terms of companies’ sales and profits.
“Firms continued to see a deterioration in their profits, with a net 10% of firms reporting lower profits,” the ECB said.
The survey indicated that the overall economic outlook is seen as the primary factor in constraining the availability of external financing.
And, it noted that firms’ expectations for annual inflation over the next year ticked up to 2.6%, while expectations for the three- and five-year time horizons remained at 3% — adding that “most firms continued to indicate that risks to the inflation outlook were tilted to the upside.”
Looking ahead, firms expect the availability of funding to “remain broadly unchanged over the next three months,” the central bank said. Yet, it also noted that “firms were marginally more optimistic about future investment than they had been in the preceding quarter.”