ECB policy easing is working

Whisper it softly but Eurozone economic prospects are improving.

Six-month momentum of real non-financial M1 turned positive in October, reaching a three-year high in November. The recovery has been broadly-based across countries, with German momentum slightly above the Eurozone average – see chart 1.

Chart 1

Chart 1 showing Germany Ifo Manufacturing Business Expectations & Eurozone / Germany Real Narrow Money (% 6m)

The sectoral breakdown shows that real M1 deposits of both households and non-financial corporations have returned to growth – in contrast to the UK, where corporate narrow money is still contracting, in nominal as well as real terms.

Economic news supports further policy easing. Six-month headline / core CPI momentum is close to target (2.1% / 2.2% annualised respectively in December) and there are signs of labour market softening, including a pick-up in consumer unemployment expectations – chart 2.

Chart 2

Chart 2 showing Eurozone Unemployment Rate & Consumer Survey Unemployment Expectations

The Swiss National Bank started cutting rates in March, three months before the ECB, with the cumulative reduction now 125 bp versus 100 bp in the Eurozone. Swiss six-month real narrow money momentum is stronger and likely to be matched by the Eurozone soon – chart 3.

Chart 3

Chart 3 showing Real Narrow Money (% 6m)

The UK is lagging because the backward-looking MPC started later with cuts of only 50 bp. A stall in six-month real narrow money momentum from last spring signalled that the economy was heading for renewed stagnation well before the end-October Budget.

Improving Eurozone economic prospects may partly explain a spate of upgrades to corporate earnings forecasts by equity analysts. A positive January revisions ratio contrasts with negative readings in the US / UK and supports the monetary suggestion of a recovery in manufacturing surveys – chart 4.

Chart 4

Chart 4 showing Germany Ifo Manufacturing Business Expectations & MSCI EMU Earnings Revisions Ratio (IBES, sa)

This entry was posted on 22 January 2025.

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