Eurozone / US monetary trends diverging
Simon Ward
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Eurozone monetary statistics for October are disappointing, showing a further decline in annual growth of narrow money M1 (from 6.2% to 4.9%) and continued sluggishness in the broader M3 measure.
Real (i.e. inflation-adjusted) M1 is the best monetary leading indicator of the economy and has stagnated over the last six months, signalling a sharp slowdown in Eurozone industrial output in early 2011 – see first chart. Recent buoyancy in business surveys is unlikely to last.
M3 grew an annual 1.0% in October. The counterparts analysis reveals mutual support operations by banks and governments last month – credit to general government rose by €165 billion, or 5%, while central governments increased their deposits and holdings of bank securities by €70 billion. Also notable was a €108 billion fall in banks' net external assets, consistent with non-bank residents moving funds out of the Eurozone area.
The slump in six-month real M1 growth contrasts with a strong pick-up in the US, suggesting that the US economy will outpace Euroland in early 2011 – second chart. With the US trend improving, G7 real M1 growth remains consistent with respectable global economic expansion.
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