The key chart
The key message
Strip out lending to households (mainly mortgages) and private sector lending in the euro area (EA) is falling in real terms. Why does this matter?
A resynchronisation of money and credit cycles in the euro area is one of three key signals indicating a sustained economic recovery for investors and policy makers alike. The ideal scenario would see a reduction in the deflationary forces that drove M3 growth during the pandemic (i.e. HH money holdings) combined with a recovery in productive lending to the private sector. To date, we have witnessed progress in the former but not in the latter.
Monthly flows of HH deposits in April, May and June 2021 were below pre-pandemic levels, for example. Lending to the private sector is slowing too, however, from 4.7% at end 2020 to 3.0% at the end of 1H21. Base effects play a role here as EA corporates borrowed €243bn in the immediate “dash for cash” in March, April and May 2020. For context, net borrowing over the subsequent 12 months to June 2021 totalled only €103bn.
Significantly, total lending minus HH lending (predominantly productive COCO-based lending) contributed only 0.8ppt to the 3.0% YoY lending growth in June 2021. In contrast, HH lending contributed 2.1ppt, the bulk of which is in the form or mortgages.
In other words, current lending is essentially less-productive FIRE-based lending rather than productive COCO-based lending. While this may provide further support for house prices, a sustained recovery requires a more substantial foundation.
The six charts that matter
A resynchronisation of money and credit cycles in the euro area is one of three key signals indicating a sustained economic recovery for investors and policy makers alike.
The ideal scenario would see a reduction in the deflationary forces that drove M3 growth during the pandemic (i.e. HH money holdings) combined with a recovery in productive lending to the private sector. To date, we have witnessed progress in the former but not the latter.
To date, we have the former but not the latter. Monthly flows of household deposits in April, May and June 2021 were below pre-pandemic levels. So far, so good.
Lending to the private sector is slowing too, however, from 4.7% at end 2020 to 3.0% at the end of 1H21.
Base effects play a part here as EA corporates borrowed €243bn in the immediate “dash for cash” in March, April and May 2020. For context, net borrowing over the subsequent 12 month to June 2021 totalled only €103bn.
Significantly, total lending minus HH lending (predominantly productive COCO-based lending) contributed only 0.8ppt to the 3.0% YoY lending growth in June 2021. In contrast, HH lending contributed 2.1ppt, the bulk of which is in the form or mortgages.
In other words, current lending is essentially less-productive FIRE-based lending rather than productive COCO-based lending. While this may provide further support for house prices, a sustained recovery requires a more substantial foundation.
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.