The key chart
The key message
The key message from the money sector at the start of 2Q21 is that the euro area (EA) has taken an important first step in the road to a sustained recovery.
Recall that the rapid expansion in monetary aggregates during the COVID-19 pandemic was a reflection of DEFLATIONARY forces not inflationary ones, as some argue. Households (HHs) increased their money holdings (boosting M1 and M3) while simultaneously slowing consumption and repaying consumer credit. The key point here was that money sitting idly in overnight deposits contributed to neither growth nor inflation. This time, it really was different (see chart above)!
At the start of 2Q21, monthly HH deposits flows fell to €19bn in April 2021 from €62bn in March 2021 (key signal #1).
This is the first time since March 2020 that these flows have fallen below the €33bn average monthly flows seen during 2019.
A sustained reduction in monthly deposit flows would indicate reduced uncertainty/improved confidence with positive implications for future consumption and economic growth.
On a more cautious note, HHs repaid another €1bn of consumer credit (key signal #2) in April 2021, suggesting that the path to recover is still at a very early stage. The YoY growth rate in consumer credit turned positive (0.3%) for the first time since August 2020, but this was due to base effects and was despite the negative monthly flow (see chart above). HHs have repaid consmer credit in six of the past nine months.
Similarly, while the gap between money growth and credit growth (key signal #3) has narrowed from its recent historic high of 8ppt in January 2021 to 6ppt in April, it remains very high in a historic context (see chart above). Note that the YoY growth rate in adjusted loans to the private sector decreased to 3.2% in April 2021 from 3.6% in March 2021. Loans to NFCs fell from 5.3% to 3.2% while loans to HHs increased from 3.3% to 3.8% over the month (see chart below).
In short, one of the three key signals for 2021 has turned positive, while the other two are “less negative.” Not time for Meatloaf to re-release an old hit yet, but welcome signs nonetheless since investment narratives require consistent refuelling.
In my next post, I will explore how and where investment risks may have shifted in the meantime.
Please note that the summary comments and charts above are summaries from more detailed analysis that is available separately.