Eurozone monetary trends are signalling a return to growth over the remainder of 2013, with the periphery participating in the recovery during the second half – a development that would stun a bearish Keynesian consensus.
Eurozone-wide and country real (i.e. inflation-adjusted) narrow money trends have been an excellent guide to economic prospects in recent years, forewarning of the 2008-09 and 2011-12 recessions as well as widening core / periphery divergence. Eurozone real M1, however, resumed expansion in mid-2012 and is now growing solidly – by 3.1%, or 6.4% annualised, in the six months to April. Allowing for the usual half-year lead, this suggests a rise in Eurozone GDP / industrial output in the second quarter and faster growth during the second half – see first chart.
M1 comprises currency in circulation and overnight deposits – forms of money more likely to be related to economic transactions, explaining forecasting relevance. The ECB publishes a breakdown of overnight deposits by country of the receiving bank. The second chart shows the six-month change in real overnight deposits split between core and periphery (i.e. Italy, Spain, Greece, Portugal and Ireland). Peripheral contraction slowed during 2012 and deposits have surged in early 2013, partly reflecting a reversal of capital flight. Peripheral GDP should fall again in the second quarter but a second-half recovery may result in growth converging with the core by end-2013.
Economists who pay attention to the monetary data typically focus on broad money and credit so are likely to miss the positive message from narrow money. Real M3 has been an inferior leading indicator historically – it failed to warn of the 2008-09 recession – but is expanding modestly, consistent with economic recovery. Private-sector credit is a coincident or lagging indicator. Real loan contraction has slowed recently, consistent with a turning point in the economic cycle – first chart.
The pick-up in peripheral real narrow money has been led by Italy although Spain has also improved – third chart. Only Portugal is still contracting on a six-month basis. France moved into positive territory in April but continues to lag, as does the Netherlands. The core / periphery distinction, in other words, is becoming less relevant.
