Euroland monetary statistics for September confirm a weak economic outlook and diminishing inflation risks:
- The liquidity ratio of non-financial corporations (defined as their M3 deposits divided by bank loans repayable within five years) is at its lowest level since 2003 and seems to be following the earlier plunge in the UK ratio - see first chart. Corporate liquidity is a key influence on business investment and hiring.
- Narrow money M1 grew by an annual 1.2% in September, up slightly from July / August but otherwise the lowest on record since 1971 - second chart. Real M1 contracted by 2.3%, a fall exceeded only in 1973-74 and 1980-81. (A note in the latest ECB Monthly Bulletin shows that real M1 growth tends to lead turning points in GDP with a variable lag averaging four quarters.)
- Broad money M3 growth slowed to an annual 8.6% in September from 8.8% in August. Excluding financial intermediaries, the increase was lower, at 8.0%. Household money demand has been boosted by the flat yield curve and a rise in risk aversion, with large inflows to time deposits in recent months. Corporate money growth has slowed significantly.
- Credit expansion also continues to moderate, to an annual 10.1% from 10.8% in August. Recent growth has been partly involuntary, reflecting non-financial corporations and financial intermediaries drawing down previously agreed facilities. Credit should slow more sharply as this effect wanes.
The ECB's assessment that monetary and credit expansion poses upside risks to price stability is unsustainable. Recent trends support the case for an early further cut in official rates.
