Eurozone monetary trends are consistent with a continued but moderate economic recovery. Six-month growth in real narrow money, M1, was little changed at 2.6% (not annualised) in August – in line with its 20-year average. Excluding financial sector* holdings, real M1 expansion is running at a higher level and improved last month – see first chart. As in the UK, the non-financial measure appears to perform slightly better as a leading indicator of the economy.

Broad money, M3, continues to lag M1, flatlining in real terms over the last six months, but its forecasting performance has been patchy – it failed, for example, to signal the 2008-09 recession. Current weakness should be discounted because the savings demand to hold money is being depressed by low deposit interest rates. 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.

The second chart shows growth by country of real overnight deposits (no country breakdown is available for the cash component of M1). Last year’s divergence between Germany and France has closed, signalling similar economic prospects. Growth remains strongest in Greece and Ireland** but has fallen back in Portugal and Italy – this accords with a rise in Banca d’Italia’s Target2 deficit in August, suggesting that capital reflux to the country has stopped. Dutch relative weakness, meanwhile, persists.

*Including the European Stability Mechanism.
**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.