Eurozone money numbers better, early QE unlikely
Simon Ward
2 Comments
Eurozone monetary trends strengthened further in July, suggesting that recent ECB policy easing is bearing fruit and will lead to an economic revival later in 2014, barring external “shocks”.
Six-month growth of real (i.e. inflation-adjusted) narrow money M1 has risen from 1.6% (not annualised) in April to 2.5% in July, a solid pace by historical standards. Real M3 expansion has recovered from 0.1% to 1.1% over the same period, the latter reading being the highest since late 2012, ahead of a return to economic growth in 2013 – see first chart.
Nominal money trends have firmed notably in the latest three months, partly reflecting the ECB’s June rate cut and the announcement effect of its targeted long-term refinancing operations (TLTROs), the first of which will be allotted on 18 September. M1 and M3 rose at annualised rates of 7.3% and 5.7% respectively between April and July.
Faster M3 growth has been driven by a further rise in the balance of payments surplus*, larger outflows from longer-term bank savings into deposits as a result of falling interest rates and a slower contraction of private sector credit.
The forecasting approach here emphasises M1 because of its closer link to spending intentions and historically superior leading indicator properties. The ECB publishes a country breakdown of overnight deposits, which comprise 83% of Eurozone M1. Six-month real overnight deposit growth is strong in Spain and – surprisingly – France, while remaining solid in Italy and Germany. Dutch weakness, however, has intensified – second chart.
In other news today, the net percentage of Eurozone consumers expecting prices to rise over the next 12 months slipped from +9% in July to +7% in August but remains broadly consistent with the ECB’s inflation target, based on history – third chart.
ECB President Draghi’s Jackson Hole speech signalled that further easing measures, including full QE, are under consideration but better monetary news and the forthcoming TLTRO suggest that a decision on action will be deferred until October at the earliest.
*Basic balance, i.e. current account plus direct / portfolio investment flows.
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Reader Comments (2)
Simon, I agree with you that money looks ok in EUR at the moment, with mfis' net external assets providing a big boost. Two questions though:
(i) if investors expect the euro to depreciate as a result of US-Euro divergent monetary policies, do you see a risk that the mfis' net external asset position could eventually start to deteriorate, with a negative impact on EUR money balances?
(ii) Do you think that EUR inflation expectations falling to record lows could negatively affect households' propensity to spend and money velocity?
Stefano,
Interesting questions, thanks.
(i) The rising MFI net foreign asset position partly reflects the large current account surplus, which should persist. This could be swamped by portfolio capital outflows in the event of QE, but the consequent drag on money growth would probably just offset the direct QE boost, echoing recent Japanese experience.
(ii) The net percentage of consumers expecting prices to increase is still positive and well above the 2009 low. A fall in M3 velocity would probably be signalled by a decline in the M1 / M3 ratio - currently still rising.