Six-month growth in Eurozone-wide real non-financial M1* – the best monetary leading indicator of the economy** – slipped again in September, to its lowest since February. The decline from an April peak suggests that economic expansion will top out in the current quarter and slow in early 2014, allowing for the typical half-year lead – see first chart.
More worrying is the reemergence of a significant core / periphery divergence. Six-month growth in real M1 deposits in Italy, Spain and the three bail-out countries has fallen sharply, suggesting that a meagre economic recovery this autumn and winter will fizzle out by spring 2014 – second chart.
The peripheral slowdown mainly reflects deterioration in Italy, where real M1 deposits resumed contraction in the latest six months – third chart. Growth has eased and is unimpressive in Portugal and Spain but remains robust in Ireland and Greece – third chart.
Italian political chaos may be causing households and firms to rein back spending intentions while encouraging an outflow of capital – both would tend to depress narrow money growth. Italy’s Target2 deficit has rewidened since end-July, consistent with a turnaround in capital flows. An end-October update is due on 8 November.
Peripheral stock markets have sky-rocketed since early July and are up by 24% in dollar terms year-to-date, tying Japan at the top of the performance league table. This recovery was consistent with an earlier monetary revival but the latest statistics cast doubt on hopes of further gains.
*Non-financial M1 = physical cash and overnight deposits of households and non-financial corporations.
**See “Stylised facts of money and credit over the business cycle”, ECB Monthly Bulletin October 2013, pp18-22.
