“Rolling over, rapidly”

The key chart

The key message

The message from the euro area (EA) money sector is increasingly challenging for the “data-dependent” ECB.

The EA money and credit cycles are rolling over rapidly – the annual growth rate in narrow money fell -0.7% YoY in January, for example. Leading, coincident and lagging monetary variables are all sending negative messages for the region’s growth outlook.

Monthly household (HH) lending flows are slowing sharply for both mortgages and consumer credit. A clear warning sign for future house prices and HH consumption in the region.

With inflation still running well above target at 8.6% YoY in January 2023, the ECB remains committed to a further 50bp increase in rates in March, however. The ECB’s foot remains firmly on the brake pedal as the money sector warns of slowing economic growth.

Positive “cold-water therapy” is increasing looking like a less attractive cold shower.

Rolling over, rapidly

The EA money and credit cycles are rolling over rapidly (see key chart above). The annual growth rate in broad money (M3) fell to 3.5% YoY in January 2023, from 4.1% in December 2022 and 6.5% a year earlier. The annual growth rate in narrow money (M1) actually declined -0.7% YoY in January 2022, from 0.6% in December 2022 and 9.2% a year earlier.

Recall that growth in narrow money was the key driver in the recent expansion in total EA money supply (see chart above). This reflected the hoarding of cash, largely in the form of overnight deposits at banks, by the regions household (HH) sector. Note, however, that monthly flows of HH overnight deposits have been negative since October 2022.

Leading, coincident and lagging monetary variables are all sending negative messages for the region’s growth outlook. Real growth rates in M1, HH credit and corporate (NFC) credit typically display leading, coincident and lagging relationships with real GDP growth over time. Growth rates in all of these variables peaked some time ago and are current negative in real terms: -8.6% YoY for real M1; -4.6% YoY for real HH credit; and -2.3% YoY for real NFC credit.

Monthly household (HH) lending flows are slowing sharply for both mortgages and consumer credit. Monthly mortgage flows slowed to €1.9bn in January 2022, down from €26.7bn a year earlier and a recent peak of €30.1bn in June 2022 (see chart above). Similarly, monthly consumer credit flows fell to €0.3bn in January 2023, down from €1.1bn a year earlier and a recent peak of €3.4bn in February 2022 (see chart below). A clear warning sign for future house prices and HH consumption in the region.

Conclusion

With inflation still running well above target at 8.6% YoY in January 2023, the ECB remains committed to a further 50bp increase in rates in March, however. The ECB’s foot remains firmly on the brake pedal as the money sector warns of slowing economic growth.

Positive “cold-water therapy” is increasing looking like a less attractive cold shower.

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