Eurozone monetary statistics for July were encouraging from the perspective here, showing narrow money M1 rising by 1.0% on the month, more than reversing a 0.5% fall in June. Six-month real (i.e. inflation-adjusted) growth remains robust at 2.8% (not annualised), consistent with the current economic recovery extending into early 2014 (at least) – see first chart.
Broad money M3 continues to lag M1 significantly – it rose by only 0.1% in real terms in the six months to July. The broad measure has, however, underperformed M1 as a leading indicator historically and should be discounted now because the low level of bank deposit rates is depressing the savings demand to hold money. M1 – comprising physical cash and overnight deposits – is a better measure of money held for transactions purposes, explaining its relationship with future spending and activity.
“Creditists” will highlight a continued contraction of bank lending to the private sector as a reason for pessimism. Credit trends, however, influence economic prospects only to the extent that they affect monetary growth. Credit weakness has not caused broad money to contract because of offsetting positive contributions from external flows (partly reflecting the Eurozone’s large current account surplus), lending to governments and a reduction in banks’ longer-term (i.e. non-money) liabilities – second chart.
Modest broad money growth coupled with a shift of funds out of notice and savings accounts in response to low interest rates has resulted in robust M1 expansion and an associated economic revival that creditists and Keynesians failed to predict.
The ECB publishes a country breakdown of overnight deposits. Six-month real deposit growth remains similar in the core and periphery groupings – third chart. There are, however, notable divergences at the country level: Dutch trends suggest a continued recession while the six-month change is strongest, amazingly, in Greece – fourth chart*. The latest German and French readings are the same and higher than in Italy and Spain, where growth has eased.
*Note: the Irish series in the chart has been adjusted to exclude the impact of the liquidation of the Irish Bank Resolution Corporation in March 2013.
