The key chart
The key message
The message from the money sector in 2Q21 is that the euro area (EA) has entered “Phase 3” of the COVID-19 crisis – a phase characterised (so far) by a steady return to normality
Household (HH) deposit flows fell from €176bn in 1Q21 to €82bn in 2Q21 as uncertainly levels peaked and the accumulation of liquid assets slowed below pre-pandemic levels. HH borrowing flows recovered from €57bn in 1Q21 to €77bn in 2Q21, above pre-pandemic levels. Mortgage flows remained the key driver, increasing from €60bn to €72bn over the same period. Consumer credit also recovered, however, from net repayments of -€4bn in 1Q21 to additional borrowing of €2bn in 2Q21.
In a reversal of recent trends, the gap between quarterly flows of HH deposits and borrowing narrowed sharply from €170bn in 1Q21 to €5bn in 2Q21. That said, overall money and credit cycles remain out-of-synch with each other but the extent of the de-synchronisation has narrowed from the January 2021 peak.
Earlier this year, I identified three key signals among the messages from the money sector to look for in 2021: a moderation in monthly HH deposit flows; a recovery in consumer credit; and a re-synching of money and credit cycles. At the end of 2Q21, the first two signals have turned positive and the third is “less-negative.” Normality is starting to return, albeit slowly.
A key lesson from Phase 2 of the pandemic was that the expansion in broad money (M3) was a reflection of DEFLATIONARY not inflationary forces – heighted uncertainty, increased liquidity preference, delayed consumption, subdued demand for credit etc. Little wonder then, that so-called “reflation trades” ran out of steam – put simply, the messages from the money sector were misunderstood.
As we move into 2H21, and if the same deflationary forces continue to moderate, attention may switch back to private sector credit demand. Will it remain subdued, recover or roll over and will money and credit cycles move back into synch with each other?
Steady return to normality – in charts
2Q21 trends
Three signals revisited
Don’t misread the message – this time it WAS different
Contribution of M1 and PSC to broad money growth since 1999 (Source: ECB; CMMP)
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.