Eurozone monetary trends and leading indicators continue to strengthen, suggesting a significant pick-up in economic growth in the first half of 2015, barring external shocks.
Both narrow and broad money have surged since the ECB imposed a negative interest rate on excess reserves in June. Narrow money M1 rose by 9.8% annualised in the four months to October, with the broader M3 measure up by 4.6%.
Real or inflation-adjusted monetary trends anticipate changes in economic activity about six months ahead, according to the monetarist rule. Six-month growth of real M1 and M3 is the highest since October 2012 and March 2009 respectively – see first chart.
Pessimists will focus on a continued contraction of private sector credit. Money leads the cycle while credit usually lags or detaches. There was a similar money / credit divergence in the UK in late 2012. The monetary signal was correct: economic growth surprised positively in 2013.
The encouraging message from monetary trends is confirmed by the longer leading indicator*, which bottomed in May and rose further in October – second chart. The indicator typically leads turning points in six-month industrial output momentum by 4-5 months, suggesting that an economic pick-up is already under way.
Narrow money is growing solidly in all four major economies, with Spain strongest and Germany lagging slightly – third chart.
*The indicator uses the same components as the OECD’s Eurozone leading indicator but is designed to give earlier warning of growth turning points. It is calculated independently, allowing an estimate for a particular month to be produced by the end of the following month.
