Eurozone monetary trends are sending an increasingly positive message for economic prospects. The narrow M1 and broad M3 aggregates posted further chunky monthly gains of 1.2% and 0.7% respectively in November. Six-month growth of real M1 and M3 (i.e. deflated by seasonally-adjusted consumer prices) rose to 4.7% and 2.5% (not annualised), the fastest since 2010 and 2009 – see first chart. This pick-up reflects faster nominal monetary expansion not falling prices – the CPI edged up by 0.1% in the six months to November.
The six-month real M1 change is an excellent leading indicator of the economy: it turned negative ahead of the 2008-09 and 2011-12 recessions, resuming growth before the intervening and subsequent recoveries. The current strong pace of expansion suggests upside risk to the consensus forecast of Eurozone GDP growth of 1.1% in 2015. Real M1 is now rising more rapidly than in the UK in early 2013, ahead of major positive growth surprise.
M1 has probably been boosted by interest rate declines and an associated rise in spending intentions, reflected in an increased transactions demand for money. M3 is more supply-driven: growth continues to be supported by a large balance of payments surplus*, while bank lending to government has picked up (partly in response to the TLTROs), outflows from longer-term savings instruments into deposits have increased and private sector credit contraction has slowed – adjusted for sales and securitisation, bank loans to non-government residents rose marginally in the latest three months.
The ECB publishes a country breakdown of overnight deposits, comprising about 80% of Eurozone M1. The pick-up in Eurozone six-month real deposit growth has been driven by the periphery (i.e. Italy, Spain, Greece, Ireland and Portugal) – second chart. Of the big four economies, growth remains strongest in Spain but is now significantly higher in France and Italy than Germany – third chart.
*Basic balance, i.e. current account plus net direct / portfolio investment flows.
