Eurozone monetary trends remain consistent with solid economic growth but there has been no further pick-up since QE began in March. This suggests that 1) further monetary policy easing is unwarranted and 2) more QE would, in any case, be ineffective.

The best monetary measure for forecasting purposes, according to ECB research, is real (i.e. inflation-adjusted) non-financial M1, comprising holdings of currency and overnight deposits by households and non-financial corporations. Six-month growth of this measure surged between spring 2014 and early 2015, signalling improving economic prospects – see first chart. GDP growth moved up from 0.7% at an annualised rate in the first three quarters of 2014 to 1.6% in the fourth quarter and 1.8% in the first half of 2015. Survey evidence suggests a similar pace in the third quarter. This appears to represent above-trend expansion, judging from an accompanying decline in the unemployment rate and a rise in manufacturing capacity utilisation.

Six-month growth of real non-financial M1 has retreated from a peak reached in January 2015 but has remained robust and rebounded in September. Growth in real non-financial M3 has followed a similar pattern. The message is that GDP expansion should continue at around its recent pace through early 2016, at least.

QE has not resulted in a further rise in money growth because the positive impact of asset purchases has been neutralised by reduced buying of government bonds by banks and an external capital outflow. This mirrors experience in the US, UK and Japan, discussed in previous posts. The lack of monetary impact suggests that the economic benefits of QE have been much smaller than its promoters claim.

Country-level data show a recent slowdown in real M1 deposits in the core countries but an offsetting pick-up in the periphery – second chart. Spain moved back to the top of the big four ranking last month, with Italy also rebounding; growth has cooled but remains solid in France and Germany – third chart.