Another drop in lending to companies in the 17-country eurozone showed the economic downturn is deepening, as a brighter mood on financial markets fails to catch on with businesses.
The European Central Bank said Thursday that loans to non-bank businesses shrank 1.4 percent year on year in September, double the 0.7 percent contraction reported the month before.
The numbers show the economy is struggling despite efforts by the central bank to stimulate credit and calm financial markets fearful that the eurozone might break up. The ECB has cut its main interest rate to a record low 0.75 percent and made €1 trillion ($1.3 trillion) in cheap loans to banks that don't have to be paid back for three years.
Even so, that easy money is not making it from banks to businesses and consumers, largely because demand for credit remains weak.
Businesses see no reason to borrow to invest in expanding production. Meanwhile, banks in some countries have less to lend because they are struggling to recover from losses on real estate loans that didn't get paid back and on government bonds that have fallen in value due to fears about those governments' finances.
The eurozone economy shrank 0.2 percent in the second quarter after zero growth in the first quarter, and the outlook for the rest of the year remains poor. A drop in output in the third-quarter — for which numbers are due Nov. 15 — would put the eurozone in a technical recession, defined as two consecutive quarters of contraction.
The ECB's loan report "is disappointing news and consistent with our view that the eurozone economy is still in a mild recession," said Marie Diron, economic adviser to Ernst & Young.
"Much of the fall in loans is probably accounted for by companies preferring to preserve cash or repay debt rather than banks tightening credit conditions even further," she said.
The eurozone crisis over governments with too much debt is increasingly about lagging growth and less about financial panic. European Central Bank steadied financial markets with its announcement Sept. 6 that it was willing to buy unlimited amounts of government bonds issued by indebted countries, if those countries ask for help and agree to take steps to reduce their debt levels.
Such bond purchases would lower the borrowing costs those countries face in bond markets and give them breathing space to sort out their finances. Stocks, bonds and the euro have rallied since the ECB unveiled its plans.
Yet the better mood has not passed on to business executives.
"Businesses are not seeing as many reasons to feel more upbeat after the ECB's announcement... as financial markets," said Diron.
Other indicators point down as well, even in the region's strongest economies. Germany's Ifo survey of 7,000 businesses fell for the sixth month in a row in October and companies are warning about sales.
Mass-market carmakers are struggling as high unemployment dries up demand for less expensive cars, particularly in Spain, Italy, Greece and Portugal. France's PSA Peugeot Citroen is closing its Aulnay plant and ending 8,000 jobs, while Ford Motor Co. said Wednesday it would close a major plant in Genk, Belgium, resulting in 9,500 job losses.
All this bodes ill for Europe's quest to find a permanent end to its debt crisis. Growth is the quickest way to reduce debt because it increases government tax revenue and shrinks the size of the debt relative to the economy. Statistics this week showed average levels of eurozone government debt went over 90 percent of annual economic output for the first time in the history of the euro.
In a more upbeat sign for Europe, bank deposits have been recovering in Greece and Spain, suggesting easing fears of an imminent break-up of the eurozone.
Depositors and investors became more willing during the financial crisis to pull money out of banks in troubled eurozone countries due to fears the governments might default on their debts and cause a worse crisis, or that the country might leave the eurozone altogether. A reversal of those flows shows increasing confidence.