Eurozone economic resilience consistent with monetary trends
Simon Ward
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Recent Eurozone economic news has been stronger than expected and somewhat at odds with trends in other countries, particularly the US. This could reflect the region's historical tendency to lag the global cycle but is also consistent with relative monetary trends.
As previously discussed, narrow money, M1, is likely to be a better guide to monetary conditions at present than broader measures, with the demand to hold broad money depressed by negative real deposit interest rates. Eurozone real M1 rose by 2.7%, or 5.5% annualised, in the six months to June, comfortably above growth rates in the US, Japan and, probably, the UK (for which June figures are published tomorrow) – see first chart. Among major developed economies, real M1 expansion is faster only in Switzerland and Canada – both economies have been growing solidly.
A post in May suggested that relatively strong M1 expansion would contribute to a reversal of the underperformance of Eurozone equity markets earlier in 2010. The region has since rallied relative to the US and Japan – second chart – although non-EMU European markets like the UK and Sweden have also performed strongly, suggesting that monetary trends are not the sole explanation.
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