Eurozone money measures rose strongly again in July, reinforcing the positive view here of economic prospects. Narrow money is growing much faster than in the US, suggesting superior Eurozone economic performance over the next six to 12 months.

Broad money M3 and narrow money M1 rose by 0.8% and 1.2% respectively in July. Annual M3 growth was 5.3%, equal to a high reached in April, while M1 growth surged to 12.1% – the strongest since 2009.

The money measure with the best economic forecasting properties, according to ECB studies, is non-financial M1, comprising currency and overnight deposits held by households and non-financial corporations. Six-month growth in this measure has been running at about 5% since late 2014, with July at 5.2%, or 10.7% annualised – see first chart.

Growth in real terms (i.e. relative to consumer prices) has moderated since end-2014, reflecting a recovery in inflation. However, the current six-month increase of 4.3%, or 8.9% annualised, remains strong by historical standards, suggesting solid economic prospects. Six-month inflation, moreover, is likely to pull back near term on oil and exchange rate effects.

In addition to money supply strength, bank loans to the private sector, adjusted for sales and securitisation, rose by 0.3% in July, pushing annual growth up to 1.4% – the fastest since 2011. Unlike money, credit is a coincident or lagging indicator of the economy. With narrow money trends signalling solid economic growth, lending should pick up further.

US real narrow money M1 rose by 2.1%, or 4.2% annualised, in the six months to July*. The recent gap between Eurozone real non-financial M1 growth and US real M1 growth is the largest since early 2010. GDP grew faster in the Eurozone than the US over the subsequent year**.

The ECB publishes a country breakdown of overnight deposits but not currency. Among the big four, six-month growth of real deposits is strongest in France and Spain, with Italy lagging – second chart. Consistent with the positive French signal, Insee business surveys for August were upbeat, with composite climate indicators for services and industry at their highest since 2011.

The outflow of deposits from Greek banks slowed to €1.7 billion in July after €8.1 billion in June but, surprisingly, the overnight component rebounded, reducing the six-month decline in real deposits sharply – third chart. Growth remains strong in Ireland but fell back in Portugal after a spike last month.

*US non-financial M1 is available only quarterly and with a lag – the latest datapoint is for end-March.
**GDP rose by 2.8% and 1.9% respectively in the year to the first quarter of 2011.