Eurozone narrow money trends continue to weaken, signalling a sharp slowdown in economic growth in the first half of 2011.
Commentary on November monetary statistics is likely to focus on a small pick-up in broad money, M3, growth, to an annual 1.9% from 0.9% in October. Narrow money, M1, however, has been a much better economic leading indicator historically; it contracted in real terms ahead of the last recession, while M3 was still growing solidly. M1 rose by an annual 4.6% in November, down from 4.9% in October. Ominously, its inflation-adjusted level was lower than six months earlier – see first chart.
M1 comprises currency in circulation and overnight deposits – forms of money more likely to be related to economic transactions. M3 also includes time and notice deposits and money market funds, making it more susceptible to changes in savings behaviour. The recent slight pick-up reflects these components and is probably related to escalating financial stress that has caused investors to hold more of their wealth in liquid form (i.e. a rise in the precautionary demand for money).
Available country M1 information suggests that the Eurozone periphery is locked into a "double dip" that will undermine fiscal consolidation plans. The ECB publishes a country breakdown of overnight deposits but not currency. The deposits analysis shows a 2.8% real contraction (not annualised) in peripheral economies – Greece, Ireland, Italy, Portugal and Spain – over the last six months. This is comparable with the decline in early 2008 just ahead of the plunge into recession – second chart. Weakness is most pronounced in Greece but real M1 deposits are falling in all five economies, with a notable acceleration in the pace of contraction in Italy recently – third chart.
Eurozone-wide real M1 trends are stronger than in early 2008, reflecting continued expansion in the core – Austria, Benelux, France and Germany. Core growth, however, has fallen sharply since the summer, suggesting a slowdown in internal economic momentum to accompany an intensifying drag from the periphery. Country figures reveal a contraction of real M1 deposits in Belgium and the smallest six-month rise in Germany since late 2008.
