The key chart
The key message
Rising inflation distorts the 2Q22 messages from the euro area’s (EAs) money sector significantly.
Ignore inflation and the three key signals that I have been following consistently since early 2021 are all sending broadly positive messages for the region’s economic outlook. Monthly household (HH) deposit flows have moderated sharply, reflecting lower levels of uncertainty. The demand for consumer credit has recovered with the largest quarterly flows since the recovery began in 2Q21. Growth rates in money supply and private sector credit have also re-aligned as money and credit cycles have re-synched with each other. Finally, the contribution of productive COCO-based lending has increased, with growth in lending to corporates (NFCs) outstripping mortgage growth in June 2022. So far, so good.
Take inflation into account and the messages are very different, however. Private sector credit (PSC) is slowing in real terms (-2.3% YoY). With the exception of lending to non-monetary financial corporations (8% of total PSC), the growth rates in all forms of PSC are declining in real terms. Furthermore, trends in real M1, real HH credit and real NFC credit are all slowing sharply in a coordinated manner. This matters because these factors typically display leading, coincident and lagging relationships with real GDP.
Plenty of information for optimists and pessimists to debate but with increasing ammunition for the pessimists…
Accounting for inflation
Rising inflation distorts the 2Q22 messages from the euro area’s (EAS) money sector significantly.
The good news
Ignore inflation and the messages are broadly positive for the region’s economic outlook.
Monthly HH deposit flows have moderated sharply, reflecting lower levels of uncertainty. The monthly flow fell to €9bn in June 2022 (see chart above). This is well below the average pre-pandemic flows of €33bn and the peak flow of €78bn in April 2020 when HH uncertainty levels peaked at the height of the pandemic crisis.
The quarterly HH deposit flow in the 2Q22 was €53bn (see chart above). This compares with average quarterly pre-pandemic flows of €90bn. The message here is the same – HHs in the EA are no longer hoarding cash in the form of bank deposits. This is reflected, in turn, in the slowdown in broad money growth (see below).
The demand for consumer credit has recovered. Monthly consumer credit flows slowed from €2.4bn in April 2022 and €3.3bn in May 2022 to €1.8bn in June 2022 (see chart above). The YoY growth rate of 3.3% was the second highest rate of growth since consumer credit recovered in April 2021, however (after May 2022’s 3.4% YoY).
The quarterly flow of consumer credit in 2Q22 of €7bn was the largest quarterly flow since the recovery started in 2Q21. There have now been five consecutive quarters of positive consumer credit flows (see chart above), albeit these flows remain below the pre-pandemic levels.
After the recent unprecedented de-synchronisation of money and credit cycles, growth rates in EA money supply and private sector credit have now converged (see chart above).
The YoY growth rate in broad money (M3) fell to 5.7% in June 2022, the slowest rate of growth since February 2020. In contrast, the growth rate in private sector credit rose to 6.1% YoY, the fastest rate of growth since private sector credit growth turned positive in Mach 2015.
Recall that in January 2021, the gap between the growth rate in M3 and the growth rate in private sector credit was 8ppt. In June 2022, private sector credit grew faster than broad money, suggesting that the period of excess liquidity (see green shaded area in graph above) may be ending.
The contribution of productive COCO-based lending is also increasing with the growth in lending to corporates (NFCs) outstripping the growth in mortgages. COCO-based lending contributed 2.5ppt to the total (unadjusted) growth rate in private sector credit of 5.8% (see chart above). This compares with a contribution of only 0.6ppt a year earlier.
Less productive FIRE-based lending is still contributing more (3.3ppt) than COCO-based lending to total loan growth, but corporate lending is now growing faster (5.9% YoY) than mortgage lending (5.3% YoY). Corporate and mortgage lending represent the largest segments of COCO-based and FIRE-based lending respectively.
The bad news
Take inflation into account and the messages are very different, however. PSC is growing 6.1% YoY in nominal terms, the fastest rate of growth since January 2009. In real terms, however, PSC is falling -2.3% YoY. With the exception of lending to non-monetary financial corporations (8% of total PSC), the growth rates in all forms of PSC are declining in real terms.
Furthermore, trends in real M1, real HH credit and real NFC credit are all slowing sharply in a coordinated manner. This matters because these factors typically display leading, coincident and lagging relationships with real GDP over time. (See “Look beyond the yield curve” for more details about these indicators)
Conclusion
The three key signals from the money sector that we have been following consistently since early 2021 are all sending broadly positive messages – HHs have stopped hoarding money, they are borrowing more to fund consumption, and money and credit cycles are re-synching. The on-going recovery in productive COCO-based lending is also positive.
Rising inflation is over-taking these positive trends, however. PSC is falling in real terms and traditional leading, coincident and lagging monetary indicators have turned down sharply and in a coordinated fashion. Plenty of ammunition here for pessimists…
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.