Investment in the Eurozone held its own last year in the face of the energy price shock from the war in Ukraine and rising economic uncertainty. That’s great news, but it won’t last. All leading indicators for capex are now rolling over, pointing to a significant slowdown in private investment of the next two-to-three quarters. Our chart of the week paints a particularly grim picture, plotting the collapse in credit demand for investment among non-financial firms, surveyed by the ECB. The picture is not much better if we consider the supply of credit. Lending standards have tightened significantly in the past six months, due to higher interest rates and, more recently, a spillover from turmoil in U.S. banking. And we could go on. Growth in inflation-adjusted profit margins have stalled, non-financial firms’ deposits are now falling outright, and survey data suggest that the inventory cycle is turning. These signals can’t be ignored. We now see investment falling outright in the next few quarters, keeping GDP growth depressed, close to zero in Q2 and Q3, before a rebound in Q4.
Claus Vistesen, Chief Eurozone Economist