“Uncertainty reigns”

The key chart

Summary

The latest message from the euro area (EA) money sector is clear – unprecedented levels of uncertainty continue to challenge the “v-shaped recovery” narrative.

The fastest YoY growth in M3 since July 2008 (8.9%) largely reflects increased holdings of overnight deposits, which contributed 7.6ppt to the headline growth alone. May’s monthly flow of overnight deposits of €167bn (3m MVA) was 3.2 times the average monthly flow in 2019. Households (HHs) and corporates (NFCs) continue to demonstrate strong liquidity preferences – €9.6trillion is currently sitting in (cash) and overnight deposits despite negative real rates of return.

From a counterparts’ perspective, credit to private sector contributed 5.3ppt to broad money growth with increasing demand from NFCs and resilient HH demand for mortgages offsetting on-going weakness in HH demand for credit for consumption. No major change in the message here.

Looking forward, there is some support for the argument that we may have passed the low point in the “sharpest and deepest recession in non-wartime history”, but little to suggest that the recovery will be anything other than “sequential (geographically), constrained and uneven” (M. Lagarde, 26 June 2020). The answer lies largely in the extent to which the increase in savings highlighted here is “forced” or “precautionary”. Forced savings can be released relatively quickly to support economic activity. In contrast, precautionary savings are unlikely to move straight into investment and consumption.

Previous CMMP analysis indicates persistent private sector net financial surpluses since the GFC and suggests a bias towards more precautionary savings. These are unlikely to more rapidly into either investment or consumption and pose an on-going challenge to the “v-shaped recovery” narrative.

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

The six charts that matter