The key chart
The key message
Inflation hawks in the euro area may cheer January’s record 12.5% YoY growth in broad money, but doves will take comfort from what is happening behind the headlines.
- There is no sign of a moderation in household (HH) monthly deposit flows – January’s flows (€60bn) remain almost 2x the 2019 average and money sitting idly in savings accounts contributes to neither GDP nor inflation (n.b. growth in overnight deposits contributed 10.1ppt to overall money growth)
- The gap between the money and credit cycle widened to a new high of 8.1ppt compared with 1.5ppt a year earlier. Credit demand remains subdued, despite the low cost of borrowing, while money supply accelerated. This is not a typical cycle
- Finally, the region’s HHs have paid down consumer credit in four of the past five months. January’s -2.5% YoY change in consumer credit was the weakest level since February 2014
There is nothing in today’s data to change the pre-existing narrative. At the end of January, the score is 3:0 to the doves.
Three key charts for 2021 revisited
Inflation hawks in the euro area may cheer January’s record growth in broad money. M3 grew 12.5% YoY in January, from 12.4% in December 2020 and 11.0% in November 2020. This is the fastest rate of growth in the ECB’s current data series extending back to 1981 (see key chart above) and matches the previous peak level recorded in October and November 2007. Growth in narrow money (M1) also hit a new high (16.4% YoY) and contributed 11.3ppt to the total growth in M3. Within M1, overnight deposits grew 17.1% YoY and contributed 10.1ppt to the total growth in M3 alone. At this point, inflation hawks might begin to wonder…
Inflation doves, in contrast, will take comfort from what is happening behind the headlines. Earlier this month, I suggested that there were three key signals among the messages from the money sector to look for in 2021:
- First, a moderation in monthly deposit flows
- Second, a re-synching of money and credit cycles
- Third, a recovery in consumer credit
Key signal #1
Euro area HHs deposited €60bn in January, 1.8x the average 2019 monthly flow of €33bn. In the past three months, HH monthly flows have increased by €61bn (1.9x), €52bn (1.6x) and €60bn (1.8x) suggesting that HH uncertainty levels remain elevated. NFC monthly deposits of €22bn in January were also 1.7x their respective 2019 average. The key point here is that money sitting idly in savings accounts contributes to neither GDP nor inflation.
Key signal #2
The gap between the money and credit cycle widened even further in January. Private sector credit (a key counterpart to M3) grew by 4.4% YoY on an adjusted basis, down from 4.7% in December, and contributed only 5.4ppt to the growth in broad money (versus 5.7ppt in December). The difference between the growth in lending and the growth in money supply is now a new record of 8.1ppt. This compares with 1.5ppt a year earlier. Note that, in typical cycles, monetary aggregates and their counterparts move together. Money supply indicates how much money is available for use by the private sector. Private sector credit indicates how much the private sector is borrowing. The key point here is that credit demand remains relatively subdued, despite the low cost of borrowing, while money supply has accelerated. This is not a typical cycle.
Key signal #3
HHs repaid €2.5bn in consumer credit in January 2021 and the YoY growth rate fell to -2.5%, the weakest level since February 2014. Recall that consumer credit represents one section of COCO-based lending. It supports productive enterprise since it drives demand for goods and services, hence helping NFCs to generate sales, profits and wages. With HHs hoarding cash and lockdown measures remaining in place, weakness in consumer credit is not unexpected.
Conclusion
While inflation hawks may cheer accelerating growth in EA broad money, doves will correctly look beyond the headlines to note that HHs remain uncertain and continue to hoard cash, the gap between the money and credit cycle has widened even further and consumer credit trends remain weak. As yet, there is nothing in the messages from the money sector, to change the pre-existing narrative. At the end of January, the score is 3:0 to the doves.
Please note that the summary comments and charts above are extracts from more detailed analysis that is available seperately.