Euroland monetary trends have stabilised since the spring but continue to suggest a weak economic outlook – GDP may rise at a 1.0-1.5% annualised pace through early 2019 versus ECB / consensus expectations of about 1.75%. Slower growth may feed through to a stabilisation or slight rise in unemployment, complicating the ECB’s exit strategy.
Headline annual growth rates of M1 and M3 fell to 6.4% and 3.5% respectively in August, the lowest since 2014. Weakness partly reflected a decline in financial institutions’ deposits, probably connected with slowing QE: annual growth of non-financial M1 and non-financial M3 has held up slightly better recently, though is well down from 2016-17 – see first chart.
The forecasting approach here emphasises six-month growth rates of real (i.e. inflation-adjusted) non-financial M1 and non-financial M3. These reached lows in April-May and have since moved sideways. Allowing for a typical nine-month lead, this suggests that two-quarter GDP growth will ease further into January-February 2019, stabilising thereafter – second chart.
Two-quarter GDP growth is currently estimated at 0.77%, or 1.55% at an annualised rate, in the second quarter of 2018. Money trends argue against the ECB / consensus view that growth will bounce back, to about 1.75% annualised, in the second half of 2018 / early 2019.
Potential GDP expansion is estimated by the EU Commission, IMF and OECD to be 1.4-1.6% in 2018. Assuming that actual growth falls below this range in late 2018 / early 2019, the unemployment rate would be expected to stabilise or rise slightly. The September EU Commission consumer survey hints that the falling trend is approaching an end, with the net percentage of respondents expecting a rise in unemployment over the next year at an 18-month high – third chart.
A fall in stockbuilding could contribute to a further GDP slowdown during the second half. On current estimates, stockbuilding rose to 0.55% of GDP in the second quarter of 2018, the highest since 2011 – fourth chart. Stockbuilding accounted for two-thirds of the GDP rise of 0.77% between the fourth quarter of 2017 and second quarter of 2018, i.e. GDP excluding inventories grew by only 0.27% over the two quarters.
As the chart shows, the stockbuilding share of GDP is inversely correlated with the net percentage of firms reporting above-normal stocks of finished goods in the EU Commission industrial survey, with the latter leading slightly. This relationship supports the forecast of a second-half GDP drag.
The fifth chart shows a separation of real non-financial M1 deposits into household and non-financial corporate (NFC) components. Corporate real deposit growth recovered in August but, excluding July, was the lowest since 2012. Weakness is consistent with the view here that a profits squeeze is under way and will feed through to slower business investment and hiring. Household real deposit growth has been more resilient, suggesting better prospects for consumer spending, for now.
Growth of real non-financial M1 deposits is now similar across the big four economies – sixth chart. Growth is weakest in Italy and has stabilised in France and Spain, though is well down from a year ago. German growth continues to move sideways. In no case is a rebound in economic momentum suggested.
