Better Eurozone money supply numbers for May hold out hope of a stabilisation in region-wide economic activity later in 2012. The core / periphery split, however, remains unfavourable, implying no end to recessions in the latter grouping.
Commentary on today’s statistics may focus on a further fall in private sector loans in May but credit is a coincident or lagging indicator of the economy, while money leads. The three money supply measures – M1, M2 and M3 – all rose solidly last month, more than reversing declines in April.
Real M1 (i.e. the sum of currency in circulation and overnight deposits, deflated by consumer prices) is the best monetary forecasting indicator of the economy. Its six-month change recovered to 0.5% in May (seasonally adjusted, not annualised) – still weak but the strongest reading since August. Allowing for the typical half-year lead, this suggests that industrial output will stabilise by the autumn – see first chart. Real M3 has a less reliable relationship with future activity but its six-month change also returned to positive territory in May, at 0.7%.
The money measures were boosted in May by bank purchases of government bonds – up from €1.9 billion in April to €28.4 billion, though well below January’s €57.0 billion peak – together with a flow of funds out of longer-term, non-monetary instruments (i.e. deposits and bank bonds of more than two years’ maturity). French banks bought €13.7 billion of government bonds last month – helping to explain a sharp fall in the French / German yield spread over the month – while Italian banks purchased €12.3 billion. Spanish banks’ holdings, by contrast, were little changed for a second month.
A disappointing feature of today’s data is that the recent rise in real M1 has been focused on core countries, with peripheral deposits still contracting, albeit at a slower pace than in early 2012 – the second and third charts show six- and three-month changes respectively. (The periphery is defined here as the three bail-out countries plus Italy and Spain.) The peripheral decline partly reflects ongoing capital flight but this does not diminish the negative economic implications – recessions should extend through the autumn (at least).
The country data also confirm an acceleration of deposit outflows from Greek banks following the inconclusive 6 May election – bank deposits held by non-banks, excluding central government, fell by a record €9.1 billion, or 5.3%, last month.
