Eurozone monetary trends continue to weaken, signalling an economic slowdown this spring and summer and casting doubt on the wisdom of the coming official interest rate hike.
The headlines look favourable, with the broader M3 money supply measure rising by 0.5% in February, pushing annual growth up from 1.5% to 2.0%. The trend, however, has deteriorated in recent months, with six-month expansion falling from a peak of 3.5% annualised in August to 1.1% in January and just 0.6% in February.
Narrow money M1, moreover, contracted in the six months to February, by an annualised 0.8% – the first six-month decline since August 2008, when the economy was in freefall.
Recent trends, of course, look much worse in real terms, with consumer price inflation boosted by energy and food price increases.
Real M1 is a good leading indicator of economic activity. It contracted from late 2007 ahead of the onset of the recession in spring 2008 and surged in late 2008 before a GDP recovery from mid-2009 – see first chart. Real M3 has been much less reliable, although the two measures are currently giving an identical message.
M1 comprises currency in circulation and overnight deposits. The ECB provides a geographical decomposition of overnight deposits but not currency. As the second chart shows, real deposit weakness was initially focused on peripheral economies – defined here as Greece, Ireland, Italy, Portugal and Spain – but has now spread to the core. The fall in business expectations in today's Ifo survey for March probably marks the start of a sustained decline.
