The key chart

Summary

March’s monetary development statistics from the ECB provide early insights from the money sector into the impact of the COVID-19 on the EA economy. Broad money (M3) growth jumped to 7.5%, the fastest YoY growth rate since December 2008. The key messages for the real economy here are threefold: (1) households and corporates are maintaining a high preference for holding liquid assets (€9.3tr) in the face of higher uncertainty and the low opportunity cost of holding money; (2) corporate demand for ST emergency liquidity has jumped sharply with government support playing an important role in ensuring future credit supply; (3) the contrasting slowdown in household credit demand so far reflects weaknesses in consumer credit rather than in mortgage demand. The EA Bank Lending Survey results (also published this week) suggest that these trends are likely to continue/accelerate throughout 2Q20.

Messages from the money sector

The ECB’s “Monetary developments in the euro area” statistics for March 2020 released this morning, provide early insights from the monetary sector regarding the impact of the COVID-19 pandemic on the EA economy.

Growth in broad money supply (M3) jumped to 7.5% YoY in March 2020 from 5.6% in February. This represents the fastest rate of growth in broad money since December 2008. This growth was driven by the rapid growth in narrow money (M1) which grew 10.3% in March and contributed 7.0ppt of the total 7.5% growth in M3. Narrow money growth, in turn, was driven by demand for overnight deposits which grew 10.9% and represented 6.3ppt of the total growth in M3.

At a time of great uncertainty and with the opportunity cost of holding money very low, households (HHs) and corporates (NFCs) have a strong preference for liquidity – €9.3trillion is currently sitting in (cash) and overnight deposits with March seeing the highest monthly inflows YTD. In December 2008, overnight deposits accounted for 35% of total broad money. Today, they account for 60%. This is despite the fact that overnight rates are only 0.2% for HHs and 0.0% for NFCs compared with inflation of 0.7% (March 2020). As described in “Brutally exposed” and “Are we there yet?”, persistent HH net financial savings at a time of low/negative rates is a clear symptom of the enduring debt overhang on the EA.

From a counterparts perspective, credit to the private sector contributed 4.5ppt of the total 7.5% in broad money albeit with different dynamics between the HH and NFC sectors. On an adjusted basis, credit to the private sector grew 5.0% in March versus 3.7% in February. This is the fastest rate of growth since February 2009 (albeit, still lagging the supply of money, see “Are we there yet?” for why this matters).

NFC lending, which had been slowing since April 2019, rebounded to 5.4% YoY in March 2020 from the recent low of 3.0% in February 2020. The monthly flow of adjusted loans to NFC rose to €118bn compared with monthly flows of only €6bn and €11bn in February and January respectively.

Of this €118bn, the largest segment was ST loans with a maturity of up to 1 year which grew €46bn having fallen in the previous two months. This data is consistent with the results of the EA Bank Lending Survey (April 2020) which noted the “clear upward impact of Covid-19 pandemic on firms’ loan demand, largely driven by emergency liquidity needs.” These trends are expected to continue through 2Q20. Banks indicated that they expect credit standards from NFC lending to ease considerably on “account of the support measures introduced by governments.”

In contrast, HH credit growth slowed to 3.4% from 3.7% in January and February 2020. Mortgages, which account for over three-quarters of EA household lending, grew 4.0% from 4.3% in February and 4.1% in January. However, there was a more noticeable slowdown in consumer credit. This slowed to 3.9% in March from 6.2% in February and is now growing at the slowest rate since November 2016. The bank lending survey noted that, “A continued net tightening of credit standards and a strongly negative net balance for household loan demand are expected by banks in the second quarter of 2020”.

Conclusion

While today’s monetary data contains few surprises, it does provide valuable insights into the impact of COVID-19 on the real economy. Uncertainty remains elevated in both the HH and corporate sectors and liquidity preferences support my earlier hypothesis that the EA is still dealing with an enduring debt overhang – a topic that I will be returning to in an update of sector balances in the EA.

There is a positive sign from the NFC sector. The increase demand for ST emergency funding is obvious, and indications from banks that government support will facilitate an easing of credit standards in 2Q20 is welcome. The signs from the HH sector are less encouraging. The negative impact on consumption can already be seen and, in contrast to the NFC sector, banks expect credit standards to tighten in the near future. Expect further divergence in NFC and HH credit growth over the next quarters.

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