Eurozone flash PMIs this week were less bad than expected, bolstering a growing consensus that economic prospects are improving. Monetary trends continue to argue the opposite.
The preferred narrow money measure here – non-financial M1 – fell for a fourth consecutive month in December in nominal terms. Bank lending also contracted on the month, while the broad non-financial M3 measure grew by just 0.1%.
The three-month rate of contraction in narrow money is a record in data back to 1970. Three-month growth of non-financial M3 is down to 2.3% annualised, less than half its 2015-19 average. Bank loan growth is also now below its corresponding average – see chart 1.
Chart 1
Bank lending weakness is being driven by repayment of short-term corporate loans, consistent with a violent downswing in the stockbuilding cycle – chart 2.
Chart 2
The six-month rate of decline of real narrow money was little changed from November’s record despite a sharp drop in six-month CPI momentum – chart 3.
Chart 3
The rate of contraction of real M1 deposits remains fastest in Italy, reflecting both weaker nominal money trends and higher inflation. Spanish positive divergence is mainly due to a much sharper recent CPI slowdown.
Chart 4
Echoing the better PMI news, German Ifo manufacturing expectations rose for a third month in January. The new demand index, however, has recovered by less and fell back this month – chart 5. European cyclical equity market sectors have outperformed on soft landing hopes and are vulnerable if business surveys now stall, as suggested by monetary trends.
Chart 5
