Eurozone narrow money trends remain consistent with an economic recovery but today’s December numbers were slightly disappointing, showing some loss of momentum into year-end. Country divergences, moreover, remain large, with troubling weakness recently in Spain and, to a lesser extent, France.
Narrow money M1 – comprising physical cash and overnight deposits – is a better economic leading indicator than the broader M3 measure, while credit is a coincident indicator. The six-month change in Eurozone real M1 has recovered from -0.8% (not annualised) in April 2012 to 2.7%* in December, a level historically consistent with respectable economic expansion – see first chart. This is down, however, from a 4.7% peak in October, suggesting that the growth pick-up will fade from the spring, allowing for the typical half-year lead.
A key focus here has been whether capital reflux and returning confidence would be reflected in a rise in narrow money in peripheral economies, warranting recovery hopes. The latest news is mixed: the six-month change in real M1 deposits was positive for a second month in Italy (0.7%) but has plunged further into negative territory in Spain (-4.5%)**. Elsewhere, growth continues in Ireland while Portuguese real M1 deposits are flat and the rate of decline in Greece has slowed – second chart.
The Italian / Spanish divergence within the periphery is mirrored by a contrast between German strength and French weakness in the core, although the decline in French real M1 deposits moderated in December. A recent sharp slowdown in Dutch growth, meanwhile, bears monitoring – third chart.
With the Eurozone monetary pick-up showing signs of stalling, the ECB may have been unwise to allow banks to make large repayments of their three-year LTRO loans, thereby reducing dramatically “excess” system liquidity. Was this Maestro Draghi’s first misstep?
*The six-month M1 change may be artificially inflated by 0.7 of a percentage point because of the initial capital subscriptions, totalling €32 billion, paid by governments to the European Stability Mechanism (ESM) in October. (ESM deposits, unlike those of central governments, are included in the money measures.)
**Spanish banking sector balance sheet statistics for December reflect both a transfer of bad loans to SAREB, a government-sponsored agency, and a capital injection in the form of securities from the ESM. These transactions have distorted credit and capital data but should not have affected deposits.
