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Eurozone money trends still weakening

27 janvier 2023 par Simon Ward

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

Chart 1 showing Eurozone Narrow / Broad Money & Bank Lending (% 3m annualised)

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

Chart 2 showing Eurozone Stockbuilding as % of GDP (yoy change) & Short-Term* Bank Loans to Non-Financial Corporations (yoy change in % 3m) *Up to 1y Maturity

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

Chart 3 showing Eurozone GDP & Real Narrow Money* (% 6m) *Non-Financial M1 from 2003, M1 before

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

Chart 4 showing Real Narrow Money* (% 6m) *Non-Financial M1 Deposits

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

Chart 5 showing Germany Ifo Manufacturing Survey & MSCI Europe Cyclical Sectors ex Tech* Price Index Relative to Defensive Sectors *Tech = IT & Communication Services