Euroland Monetary Trends Cooling

 In Market and Investment Insights

Janus Henderson Chief Economist Simon Ward reacts to the July Eurozone money supply metrics. The European Central Bank publishes a monthly report on the growth of money supply in the Eurozone.

Euroland July money numbers were weak, suggesting that economic prospects are deteriorating at the margin.

Non-financial M1 – the monetary measure with the strongest historical forecasting record, according to ECB research – was unchanged in July from June, while the broader non-financial M3 aggregate fell by 0.1%*.

Annual non-financial M1 growth of 8.8% in July was the lowest since October 2016; non-financial M3 growth of 4.6% was the lowest since December 2015 – see first chart.

EUROLAND NGDP & NARROW / BROAD MONEY (% YOY)

euroland_ngdp_narrow_broad_money_f_1

Six-month growth of the two aggregates has plunged since March: the declines between March and July were the largest over a four-month period since 2010 – second chart.

EUROLAND MONEY / LENDING & PRICES (% 6M)

euroland_money_lending_prices_f_2

The impact on six-month real money expansion has been cushioned by a parallel sharp slowdown in headline consumer prices, reflecting the unwinding of a boost from energy and food prices in late 2016 / early 2017 – second and third charts. Real money growth, however, has pulled back sufficiently to suggest a slowing of economic momentum in late 2017 / early 2018. Six-month inflation, moreover, is likely to rebound, so real money trends may weaken further.

EUROLAND GDP & REAL MONEY / LENDING (% 6M)

euroland_gdp_real_money_lending_f_3

The headline M1 and M3 measures have slowed by less than the non-financial aggregates tracked here, reflecting relative strength in money holdings of financial corporations. Such holdings, however, are of little relevance for judging near-term prospects for spending on goods and services.

Six-month real narrow money growth was higher in Euroland than the US in late 2016, signaling superior Euroland economic prospects. The gap closed in May and the US was back ahead in July – fourth chart.

REAL NARROW MONEY (% 6M)

real_narrow_money_f_4

Euroland July money numbers were weak, suggesting that economic prospects are deteriorating at the margin.

Non-financial M1 – the monetary measure with the strongest historical forecasting record, according to ECB research – was unchanged in July from June, while the broader non-financial M3 aggregate fell by 0.1%*.

Annual non-financial M1 growth of 8.8% in July was the lowest since October 2016; non-financial M3 growth of 4.6% was the lowest since December 2015 – see first chart.

EUROLAND NGDP & NARROW / BROAD MONEY (% YOY)

euroland_ngdp_narrow_broad_money_f_5

Six-month growth of the two aggregates has plunged since March: the declines between March and July were the largest over a four-month period since 2010 – second chart.

EUROLAND MONEY / LENDING & PRICES (% 6M)

euroland_money_lending_prices_f_6

The impact on six-month real money expansion has been cushioned by a parallel sharp slowdown in headline consumer prices, reflecting the unwinding of a boost from energy and food prices in late 2016 / early 2017 – second and third charts. Real money growth, however, has pulled back sufficiently to suggest a slowing of economic momentum in late 2017 / early 2018. Six-month inflation, moreover, is likely to rebound, so real money trends may weaken further.

EUROLAND GDP & REAL MONEY / LENDING (% 6M)

euroland_gdp_real_money_lending_f_7

The headline M1 and M3 measures have slowed by less than the non-financial aggregates tracked here, reflecting relative strength in money holdings of financial corporations. Such holdings, however, are of little relevance for judging near-term prospects for spending on goods and services.

Six-month real narrow money growth was higher in Euroland than the US in late 2016, signaling superior Euroland economic prospects. The gap closed in May and the US was back ahead in July – fourth chart.

REAL NARROW MONEY (% 6M)

real_narrow_money_f_8

August PMIs are consistent with the forecast that the US will resume growth leadership: the US composite output index rose to its highest since May 2015, overtaking the Euroland index – fifth chart.

PMI COMPOSITE OUTPUT INDICES (MARKIT)

pmi_composite_output_indices_markit_f_9

Definitions
Narrow money = M1: Currency and overnight deposits held by domestic households (HHs), non-financial corporations (NFCs) and financial corporations excluding banks.
Broad money = M3: Narrow money plus time deposits, notice accounts, money funds, repos and short-term bank securities.
Non-financial M1, M3: Excluding holdings of financial corporations.
Real: Inflation-adjusted.
(Real) GDP: Measure of volume of goods and services produced in given period of time.
Nominal GDP (NGDP): GDP measured at current prices.
Purchasing Managers’ Index (PMI): Indicator of economic activity based on percentages of managers reporting expansion or contraction; 50 = equal percentages.

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