FRANKFURT, Jan 28: Demand for credit in the 17-country eurozone remains weak, even though tensions seem to be easing in the region's financial markets, data published by the European Central bank showed on Monday.

Eurozone bank loans to the private sector declined by 0.7 per cent in December compared with the same month in 2011 after already shrinking by 0.8 per cent in November, the ECB calculated in regular monthly data.

A breakdown of the lending data showed that the growth rate of loans to private households appears to be slowly starting to recover, edging up to 0.5 per cent in December from 0.4 per cent in November.

By contrast, loans to non-financial corporations contracted by 2.3 per cent last month, after already shrinking by 1.9 per cent the previous month.

The central bank has long argued that falling loans to the private sector reflects weak demand for credit rather than tight lending conditions, given the pessimistic view of eurozone growth prospects and heightened risk aversion amid the crisis.

And analysts believe an upturn is unlikely to be seen any time soon as it will take time for recent more positive economic data to feed through into higher borrowing in the non-financial sector.

“An upturn is unlikely until the economy gathers momentum once more.

Our empirical studies suggest that to a large extent, the low level of lending is due to meagre demand,” said Commerzbank economist Michael Schubert.

UniCredit analyst Marco Valli said that lending to households was showing “signs stabilisation or modest recovery, while corporate lending — usually the last aggregate to turn, because it lags the business cycle — remains under pressure.”

But “if, as we expect, the next months will see a further improvement of both growth indicators and banks' funding conditions, the lending cycle is likely to embark on a moderate recovery sometime in the second half of 2013,” Valli argued.

“The eurozone may be heading for a recovery, but not a credit-fuelled one according to December monetary data,” said Berenberg Bank economist Christian Schulz.

IHS Global Insight economist Howard Archer was similarly cautious.

“Mounting evidence from surveys that eurozone economic activity bottomed out around last October has yet to be reflected in increased lending to the eurozone private sector,” he said.

“It remains to be seen if the recent overall strengthening in eurozone business and consumer confidence from late-2012 lows leads any time soon to an appreciable pick-up in demand for credit from the private sector and whether banks believe the economic situation and outlook is improving sufficiently to make it significantly more attractive and less risky to lend,” he said.

Marie Diron of Ernst & Young Eurozone Forecast said the “much more positive sentiment about the eurozone future that has prevailed in financial markets so far this year will probably take some time to materialise in greater credit availability and economic growth.—AFP