Eurozone monetary trends are improving at the margin, suggesting that the ECB’s rate cuts and liquidity injections have been at least partially effective and consistent with a stabilisation of EMU-wide output by the late summer. A recovery, moreover, has occurred in the periphery as well as the core in the last two months, a development that – if sustained – could herald an end to recessions in the former group by late 2012.
The key monetary forecasting indicator employed here is the six-month change in real narrow money M1, which outperforms the broader M3 measure. This turned heavily negative in early 2011, warning of the current recession. It recovered to -0.1% (not annualised) in March, consistent with industrial output stabilising from around September, allowing for the usual six-month lead – see first chart.
M1 comprises currency in circulation and overnight deposits. The ECB publishes a country breakdown of deposits but not currency. In the six months to March, real M1 deposits rose by 2.8% (not annualised) in the “core” (i.e. Germany, France, Benelux, Austria) but fell by 3.7% in the “periphery” (Italy, Spain, Greece, Portugal, Ireland). The peripheral decline, however, eased from 5.6% in February – second chart.
The six-month changes continue to be dominated by monetary weakness in late 2011 / January 2012. EMU-wide real M1 deposits rose by a solid 1.0% in February and March combined, with similar increases in the core and periphery – third chart.
It is still early days but a further recovery in peripheral real M1 would suggest an end to recessions by late 2012. The risk, however, is that the lagged impact of the ECB’s rate cuts and liquidity injections will be offset by the recent renewed rise in financial tensions, reflected in wider peripheral / core spreads. Further ECB rate cuts are warranted to reduce this risk.