“1Q21 update from the EA money sector”

Money growth peaked, but the message remains unchanged

The key chart

What are the messages from the money sector as money growth peaks? (Source: ECB; CMMP)

The key message

At the end of 1Q21, the cyclical and structural messages from the EA money sector remain unchanged. In terms of ST tactical trends and the outlook for 2021, we are looking for evidence of: (1) a moderation in HH deposit flows; (2) a resynchronisation of money and credit cycles; and (3) recovery in consumer credit. In terms of LT secular trends, we focus on the split between more productive COCO-based and less productive FIRE-based lending and the hidden risks of QE.

HH deposit flows remain almost double the levels seen pre-COVID and the enduring preference for holding highly liquid assets (despite their negative real returns) indicates persistently high levels of HH uncertainty. The gap between the money and credit cycles (evidenced in banks’ 1Q21 earnings) has stopped widening but remains very significant. Finally, consumer credit is still falling (and HHs repaid credit again in March) but at a slower rate than earlier in the quarter. In short, investors positioned for a sustained upturn in EA inflation will need to be patient still.

Resilient mortgage demand has been a key feature in an otherwise lacklustre retail banking sector (as in the UK). The 5.0% YoY increase in EA mortgages in March was the fastest rate of growth since May 2008. Mortgages are the largest segment of FIRE-based lending, which reached a new high of €5,891bn at the end of March, up 28% from its January 2009 level, and represented almost 52% of total lending. More productive COCO-based lending totalled €5,478bn, lower than its January 2009 peak of €5,517bn. COCO-based lending’s share of total lending has fallen from 55% to 48% of total lending over this period. The ECB is correct to highlight the positive impact of unorthodox monetary policy in terms of keeping borrowing affordable and supporting access to credit for NFCs and HHs. That said, the hidden risks of QE in “fuelling the fire” and their negative implications for leverage, growth, financial stability and income inequality in the EA should not be overlooked.

Money growth may have peaked, but the core messages from the money sector remain unchanged.

The core messages in six key charts

Key signals for 2021

Persistent HH uncertainty reflected in monthy deposit flows (Source: ECB; CMMP)
The gap between the money and credit cycles has narrowed slightly, but remains significant (Source: ECB; CMMP)
HHs are repaying consumer credit but YoY declines are slowing (Source: ECB; CMMP)

FIRE-based lending and the hidden risks of QE

FIRE-based lending hits a new high at the end of 1Q21 (Source: ECB; CMMP)
COCO-based lending is still lower than its 2009 peak (Source: ECB; CMMP)
By fuelling the fire, QE brings hidden risks that investors should not forget (Source: ECB; CMMP)

Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.