Eurozone monetary trends continue to signal a recovery in regional economic activity in early 2013. Six-month real M1 growth eased in November but remains robust at 3.7% (not annualised)* – see first chart. The November slowdown is attributable to a large rise in May dropping out of the six-month window. M1 grew by a respectable 0.4% in November alone.

Broad money M3 was unchanged in November, with a rise in deposits offset by an outflow from bank securities and money market funds. Holders of the latter may have switched into markets on perceptions of improving prospects. The statistics are consistent with banks accommodating such demand – they ran down their own securities holdings in November. The flat M3 result, in other words, may reflect disintermediation rather than signalling any cause for concern.

The sectoral breakdown of November deposit growth is favourable, showing further solid rises for households and non-financial corporations offset by a fall in financial sector holdings.

Pessimists will highlight continued private sector loan weakness but credit is a coincident rather than leading indicator of the economy – this weakness, in other words, simply confirms other evidence that activity contracted in the fourth quarter. Divergent deposit and loan movements resulted in another large rise in the corporate liquidity ratio in November; a similar surge in 2009 preceded economic recovery – second chart.

While these developments are promising, the “crisis” cannot be deemed to be over until monetary expansion resumes in the periphery. Real M1 deposits rose in November but were still down 1.2% from six months earlier – third chart. This, however, is the smallest decline since June 2010. A further return of flight capital could result in the six-month change turning positive in early 2013. Caution remains warranted until this signal is given.

Country figures reveal interesting divergences. Within the periphery, Italy’s six-month real M1 deposit change joined Ireland’s in positive territory in November – fourth chart. By contrast, French real M1 deposits have slumped since M. Hollande assumed the presidency in May: the six-month decline of 3.1% in November is the weakest result since August 2008** – fifth chart. Italian / French yield spreads may continue to narrow.

*The monetary aggregates were artificially inflated by the initial capital subscriptions, totalling €32 billion, paid by governments to the European Stability Mechanism (ESM) in October. This transfer boosted M1 by 0.7%, i.e. real six-month growth would be 3.0% in its absence.

**There have been strong inflows to tax-free Livret A savings accounts following a recent lifting of the investment ceiling. However, the bulk of such inflows probably reflects transfers from other savings accounts rather than M1 (i.e. overnight) deposits.