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.
