Leading, coincident and lagging indicators have peaked
The key chart
Watch this space – leading (real M1), coincident (real HH) and lagging (real NFC) indicators have all peaked, but remain well above the levels associated with recessions risks (% YoY, real terms). Source: ECB; Haver; CMMP analysis
The key message
January’s monetary developments data for the euro area (EA) presented no surprises. Monetary aggregates are still growing well above the levels associated with heightened recession risks.
Broad money (M3) growth increased to 5.2% from 4.9% in December 2019. Narrow money (M1) remains the main component, contributing 5.3% to this growth (other ST deposits being the negative balancing item) and accounting for 69% of the outstanding stock of M3. There is now just under €9trillion residing in (cash and) overnight deposits despite negative real rates, indicating an enduring debt overhang in the region.
Private sector credit grew 3.8% YoY, a new high in nominal terms in the current credit cycle, but lags the growth in the supply of money, reflecting the on-going deficiency in credit demand.
However, an early warning sign is flashing within the context of my money, credit and business cycle framework. Growth rates in real M1 (a leading indicator), real HH credit (a coincident indicator) and real NFC credit (normally a lagging indicator) have all peaked at the aggregate level and in Germany and France, the two markets that have driven loan growth in the region. None of these indicators imply recession risks, but they do point to a slowdown in economic activity across the euro area. Watch this space…
The charts that matter
No headline surprises – broad money (M3) grew 5.2% in January versus 4.9% in December (% YoY, nominal terms) Source: ECB; Haver; CMMP analysisGrowth trends and breakdown of M3 by component – overnight deposits (red bars) remain the key driver of money supply growth. M1 contributed 5.3% of the total 5.2% M3 growth, other ST deposits were the negative balancing item(% YoY, nominal terms) Source: ECB; Haver; CMMP analysis Confirmation of the enduring debt overhang – c Euro 9 trillion sitting in (cash and) overnight deposits despite negative real returns (Euro billions) Source: ECB; Haver; CMMP analysis
M3 = credit to EA residents + net external assets – LT financial liabilities + other counterparts
From a counterparts perspective, and on a positive note, credit to other EA residents (the purple bars) has replaced credit to central government (the green bars, QE impact) as the main driver of M3 (%YoY, nominal terms) Source: ECB; Haver; CMMP analysisEarly warnings #1 – real growth in M1 (leading indicator) has fallen from recent peak of 7.3% in November 2019 to 6.8% in January (% YoY, 3m MVA) Source: ECB; Haver; CMMP analysisEarly warnings #2 – real growth in HH credit (co-incident indicator) has also fallen from recent peak of 2.6% in November 2019 to 2.3% in January (% YoY, 3m MVA) Source: ECB; Haver; CMMP analysis Early warnings #3 – real growth in NFC credit (typically a lagging indicator) peaked at 3.0% in October 2019 and has fallen to 2.0% in January (% YoY, 3m MVA) Source: ECB; Haver; CMMP analysisGermany is the second largest contributor to EA HH credit growth after France – growth hit a new peak of 4.5% in January in nominal terms, but has fallen from 3.4% in October 2019 to 2.9% in January in real terms(% YoY) Source: ECB; Haver; CMMP analysisGermany is the largest contributor to EA NFC credit growth. Nominal growth rates peaked at 7.0% in June 2019 and have fallen to 5.0% in January. Real growth rates peaked at 5.6% in August 2019 and have fallen to 3.3% in January (% YoY) Source: ECB; Haver; CMMP analysisFrance is the largest contributor to EA HH credit growth – in nominal terms, growth hit a new high of 6.5% in January, but peaked in real terms at 5.4% in October 2019 and has fallen to 4.7% in January Source: ECB; Haver; CMMP analysisFrance is the second largest contributor to EA NFC credit growth after Germany – nominal growth rates have fallen from 8.3% in August 2019 to 5.7% in January and real rates have fallen from 6.9% to 3.9% over the same period Source: ECB; Haver; CMMP analysis
Please note that the summary comments above are extracts from more detailed analysis that is available separately
