Last week’s post on Eurozone monetary trends attracted attention – including some hostility to the suggestion that a sharp fall in Portuguese real M1 deposits foreshadows a Greek-style economic slump.

Respondents argued that the decline in M1 (i.e. overnight) deposits is irrelevant because it reflects a switch into term accounts, i.e. the money has stayed within the Portuguese banking system.

It is true that broad money is holding up better than M1 but even real M3 deposits were down by 1.8% (not annualised) in the six months to September.

More importantly, real M1 is a much better leading indicator than M3. Across a range of countries, real M1 contracted ahead of the 2008-09 recession while real M3 did not. In Portugal, for example, real M3 deposit growth remained solidly positive during 2008 even as the economy slumped.

The rationale for the better forecasting performance of M1 is that consumers and firms shift funds into or out of cash and instant-access accounts before raising or lowering spending. The recent fall in M1 deposits may, as claimed, reflect a voluntary switch into term accounts. It still implies that the money won't be spent.
 
The suggestion of a rapidly-deteriorating economic outlook is supported by a collapse in the “earnings revisions ratio”, i.e. the net number of upgrades to company profits forecasts by equity analysts, expressed as a proportion of the number of estimates. (Revisions ratios correlate closely with purchasing managers’ new orders indices in countries for which the latter are available – not Portugal.) As the chart shows, the Portuguese ratio was below both the Greek level and its own 2008-09 trough in October. Spain and Italy, admittedly, are similarly weak, in contrast to Irish relative resilience.