Eurozone narrow money trends continue to suggest an economic recovery in which peripheral countries will participate later in 2013.
Eurozone-wide narrow money M1 rose by 1.0% in May and has increased by 3.6% (not annualised) over the last six months. Adjusted for inflation, six-month growth was 3.3% in May – above an average since 1995 of 2.6%.
The broad M3 measure is expanding more sluggishly – by 0.3% in May and 0.9% over the last six months – while private-sector credit continues to contract. M1, however, is a more reliable leading indicator of the economy than M3, while credit tends to lag the cycle. M1 similarly diverged positively from M3 and credit in 2009, correctly signalling an economic recovery – see first chart.
The M1 pick-up is interpreted here as a sign of returning confidence – households and firms are increasing their holdings of transactions money in preparation for higher spending.
The ECB publishes a country breakdown of overnight deposits, which dominate M1. The six-month change in real deposits in the periphery (i.e. Italy, Spain, Greece, Portugal and Ireland) was negative over 2010-12 but has recovered strongly this year, converging with growth in the core – second chart.
Among the major countries, the six-month change in real deposits recovered sharply in France in May but turned negative in the Netherlands – third chart. Italy partially reversed an earlier large gain while Spain edged higher; recent growth in both cases is the best since early 2010. Germany slowed but remains strong.
