“2Q20 message from the money sector – the UK”

Part 2 – a similar message to the euro area

The key chart

**What uncertainty looks like – putting 2020 money holding trends into context**
Source: Bank of England; CMMP analysis

The key message

The 2Q20 message from the UK money sector is very similar to the corresponding euro area version.

Headline data points suggest little change to the existing narrative. Households (HHs) and corporates (NFCs) continue to increase their money holdings, with rolling 3m inflows for the past four months since March exceeding the total inflows recorded for the whole of 2019. High levels of uncertainty still prevail. Above trend NFC borrowing and a recovery in HH mortgage demand offset the weakest YoY trends in consumer credit (-3.6% YoY) since 1994.

Again, analysis of monthly flows presents a more nuanced picture. Flows into sterling money holdings peaked back in March 2020, but remain more than double 2019 average monthly flows. The message for UK consumption is “less negative” – HHs repaid only £86m compared with a record £7bn in April. For context, this compares with average new monthly consumer borrowing of over £1bn per month in 2019. NFCs remain active borrowers from banks and financial markets, with June’s £11bn of borrowing driven mainly by capital market issuance. Bank lending to NFCs saw divergent trends. Large corporates repaid record amounts, but SMEs borrowed an additional £10bn. The annual growth rate in SME lending hit an all-time high, reflecting the impact of government support schemes.

In short, uncertainty in the UK has also peaked but remains very elevated, still.

Six charts that matter

**HHs and NFCs continue to increase their sterling money holdings strongly**
Source: Bank of England; CMMP analysis

In-line with developments in the euro area (EA), the headlines from the Bank of England’s money supply data for June 2020 also suggest little change to the on-going “message from the money sector” narrative.

The UK’s headline money series (M4ex) grew 11.9% YoY compared with the monthly average of 2.9% in 2019. HH money holdings (64% total) increased 7.5%, NFC money holdings (23% total) increased by 23.2% (YoY), and the volatile but smaller non-intermediating financing company (NIOFC) holdings (15% of total) increased by 17.7%.

The key chart above places these trends into context. Money holdings increased by £82bn in total during 2019, at an average of just under £7bn per month. The rolling 3m sums of money holdings for the past four months – March ($86bn), April (£113bn), May (£159bn) and June (£109bn) – all exceed the 2019 annual increase. This is what uncertainty looks like!

**“Euro area trends on steroids” – above trend NFC credit and resilient HH mortgage demand offset weakness in HH consumer credit**
Source: Bank of England; CMMP analysis

Looking at the counterparts to money holdings, again the story is similar to the EA version but with more exaggerated trends. NFC lending grew 9.2% YoY, down from 11.2% in May, but above trend. Mortgage demand grew 3.0% YoY, resilient but slightly below the 2019 average growth of 3.3%. However, HH consumer credit fell by -3.6% YoY, the weakest growth rate recorded since this series began in 1994. No real surprises here (at least in terms of trends).

**Have uncertainty levels peaked, and if so, when? Monthly flows of sterling money holdings**
Source: Bank of England; CMMP analysis

Continuing the parallels with the EA message, the monthly flow data presents a more nuanced picture than the headline data suggests. Monthly flows into sterling money holdings peaked at £67bn in March, almost 10x the 2019 monthly average flow. They fell back to £16bn in June, but this is still 2.3x the 2019 average monthly flow. The more volatile NIOFC flows peaked in March, but HH and NFC monthly flows did not peak until May (both at £26bn before falling to £12bn and £8bn in June respectively). Note that these large inflows are occurring despite negative real returns. The effective interest rates on new HH time (0.73%) and sight (0.26%) hit new lows having fallen 31bp and 20bp since February 2020 respectively. The effective interest rates on NFC time (0.17%) and sight (0.13%) also fell 10bp in June 2020.

**HH lending recovers in June after 2 months of large repayments**
Source: Bank of England; CMMP analysis

After 2 months of large repayments (£7bn April, £3bn May), HH borrowing increased by almost £2bn in June. As can be seen from the chart above, the recovery in mortgage borrowing was the driver here. Looking ahead, mortgage approvals for house purchase also increased to 40,000 in June, up from the record low of 9,300 in May. However, June’s approvals were still well below February’s pre-Covid level of 73,700.

HHs repaid only £86m of consumer credit in June compared with £4bn, £7bn and £5bn monthly repayments in March, April and May respectively. Positive, or less negative, news for the UK economy, but note that this small repayment contrasts with an average of £1.1bn in new consumer borrowing per month in the 18 months to February 2020 (Bank of England, June 2020).

**Divergent trends in NFC borrowing – large corporates vs SMEs**
Source: Bank of England; CMMP analysis

NFC lending saw divergent large NFC and SME trends. Large NFCs repaid a record £16.7bn in June, following a £13bn repayment in May. Approximately half of these repayments came from public administration and defence. The YoY growth rate for large NFC lending fell to 4.8% (dotted red line above) from 15.5% YoY in April. In “Credit where credit’s due“, I highlighted the important increase in SME borrowing in May (£18bn). In June, SMEs borrowed an additional £10bn well above the previous largest monthly SME borrowing of £0.6bn in September 2016. The YoY growth rate in SME lending hit a new high of 17.7% reflecting, in part, loans arranged through the government support schemes (eg, Bounce Back Loan Scheme).

**June’s NFC financing driven by capital market issuance – bonds and equity**
Source: Bank of England; CMMP analysis

NFCs borrowed almost £11bn from banks and financial markets in June. This was below the £32bn and £16bn borrowed in March and April respectively, but similar to May’s borrowing level. June’s borrowing was driven by capital market issuance – £7bn in bond issuance and almost £4bn raised in equity.

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

“2Q20 message from the money sector”

Part 1 – the euro area narrative

The key chart

**Headline figures mask a more nuanced message from the monthly flow data**
Source: ECB; CMMP analysis

The key message

The “2Q20 message from the money sector” is simple: uncertainty in the euro area has peaked but remains elevated still.

Demand for overnight deposits remains the key driver of M3 growth
Above-trend NFC credit demand and resilient HH mortgage demand is offsetting weakness in consumer credit
Monthly flows into overnight deposits (and uncertainty) peaked in March at 5x 2019 average flows but remain 1.3x 2019 average flows
HHs have stopped paying down consumer credit and mortgage demand has remained resilient throughout the pandemic
The NFC “dash for cash” has also peaked and the monthly flow of corporate borrowing fell below the 2019 average in June
Despite negative real rates, almost €10trillion continues to sit in cash and overnight deposits
The key question – how much of this is “forced” versus “precautionary” savings – remains unanswered for now.

Six charts that matter

The headlines from the ECB’s money supply data for June 2020 suggest little change to the “message from the money sector” narrative (see key chart above). Growth in broad money (M3) rose to 9.2% YoY from 8.9% in May, the fastest rate of growth since July 2008. Narrow money (M1) grew 12.6% YoY from 12.5% in May and overnight deposits grew 13.1% YoY from 13.0% in May. M1 and overnight deposits contributed 8.5ppt and 7.6ppt to the overall M3 growth of 9.2% respectively. In short, households (HHs) and corporates (NFCs) continue to demonstrate a high preference for liquid assets despite negative real returns, which reflects high levels of uncertainty. No surprises here.

**HH and NFC loans as a counterpart to M3 (% YoY)**
Source: ECB; CMMP analysis

Looking at the counterparts to broad money, credit to the private sector contributed 5.1ppt to M3 growth down from 5.3ppt in May. HH lending stood at 3.0% YoY, flat on the month, while growth in NFC lending fell to 7.1% YoY from 7.3% in May. As before, above-trend NFC credit and resilient HH mortgage demand (4.1% YoY) offset the lack of growth in consumer credit (flat, YoY)

**Monthly flows of overnight deposits**
Source: ECB; CMMP analysis

Behind the headlines, the monthly flow data presents a more nuanced picture. Monthly flows into overnight deposits peaked at €250bn in March (5x the 2019 average flow) and have fallen back to €63bn in June (1.3x the 2019 average flow).

**HH “uncertainty” peaked one month before NFC “uncertainty” – but both remain elevated**
Source: ECB; CMMP analysis

HH deposit flow peaked at €80bn in April and has fallen to €50bn in June. NFC deposit flow peaked a month later in May at €112bn and has fallen back even faster to €42bn. In both cases, however, the latest monthly flow is still 1.2x the respective 2019 averages.

**HH no longer paying down consumer credit**
Source: ECB; CMMP analysis

After three months of negative flows, EA HHs have stopped paying down credit for consumption. They borrowed €1bn in June after negative flows of €-12bn, €-14bn and €-2bn in March, April and May respectively.

**Mortgage demand remains resilient**
Source: ECB; CMMP analysis

HHs also borrowed €10bn in June to purchase houses, down from €20bn in May. The smoothed 3m MVA of monthly mortgage flows has been trending between €10bn and €20bn for a sustained period reflecting resilient demand since mid-2017.

**Passed the peak “dash for cash”**
Source: ECB; CMMP analysis

The “dash for cash” from NFCs appears to have peaked at €121bn flow in March 2020. Since then, the monthly flow has declined to €72bn (April) and €50bn (May) to €8bn (June), below the 2019 average monthly flow of €11bn.

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

“Mind the financing gap”

Messages from the money sector IV – UK corporates

The key chart

**The recovery in NFC credit demand is a positive sign but masks the widening volume gap between large corporate and SME funding (% YoY, £25m annual turnover threshold)**
Source: Bank of England; CMMP analysis

Summary

UK corporate lending grew 11% in April 2020; the fastest rate of growth since July 2008 and in direct contrast to slowing trends in the household sector. April’s monthly change was lower than March’s “dash for cash” but was still double the monthly amounts borrowed over the previous six months. The cost of borrowing also fell to the lowest level since December 2010. NFCs are also increasing financing from bonds, commercial paper and, to a lesser extent, equities.

Behind these positive trends, the gap between large NFCs and SMEs is widening in volume terms. SMEs are benefitting from lower borrowing costs but volumes remain low and growth subdued. Furthermore, only 24p in every £ lent in the UK is directed to the NFC sector. More concerning, 77p in every pound is directed at less-productive FIRE-based lending (FIs and real estate).

The fact that NFCs are accessing finance in larger volumes and at lower costs is welcome, but the widening gap between large NFCs and SMEs and the on-going concentration of lending in less-productive sectors means that headline numbers are not as positive as they appear at first.

Mind the financing gap

**In April, NFC lending grew at the fastest rate (11% YoY) since July 2008, in contrast to slowing growth (3% YoY) in the HH sector**
Source: Bank of England; Haver; CMMP analysis

UK corporate (NFC) lending grew 10.7% YoY in April 2020, the fastest rate of growth since July 2008. This was in contrast to trends in the household (HH) sector, where credit growth slowed to only 2.5%, the slowest rate of growth since June 2015.

**M4L in the NFC sector rose £8.4bn in April versus £4.3bn average over the previous six months**
Source: Bank of England; CMMP analysis

Outstanding NFC loans grew by £8.4bn in April. This was lower than the £30.2bn raised in March but was still approximately double the average amounts borrowed over the previous six months (£4.3bn). The cost of (new) borrowing for NFCs fell to 2.26%, the lowest rate since December 2010 and 30bp lower than in February.

**NFCs raised £32bn and £16bn from banks and financial markets in March and April 2020 respectively, versus an average of £3bn over the past three years**
Source: Bank of England; CMMP analysis

Looking at wider financing trends, NFCs raised a total of £16.3bn from financial markets in April, down from the £31.6bn raised in March but still above the average monthly financing of £3.2bn seen over the past three years. After March’s “dash for cash” from banks, NFC repaid £1.0bn of bank loans in April but raised £7.7bn in bonds and £7.0bn in commercial paper (including finance raised through the Covid Corporate Financing Facility) and £1.4bn in equity.

**After March’s “dash for cash” from banks, NFCs turned to the bond and commercial paper markets in April (£bn)**
Source: Bank of England; CMMP analysis

These positive trends mask that (1) the gap between large corporates and SMEs is widening sharply in volume terms and, that (2) NFC lending remains a relatively small part of UK bank lending. SMEs are benefitting from lower borrowing costs: the effective rate on new loans to SMEs fell by 52bp to 2.49% in April the lowest level since 2016 (when the BoE series began) and almost 100bp below the 3.44% cost of borrowing in February. SMEs borrowed £0.3bn in April and March but this is only 1.2% higher than a year earlier.

**SME credit growth is above recent average but remains subdued in absolute terms (% YoY)**
Source: Bank of England, CMMP analysis

Despite the rise in NFC lending described above, only 24p in every £ of UK lending is lent to the NFC sector. Alternatively, using my preferred distinction between more productive “COCO-based” and less-productive “FIRE-based” lending, 77p in every pound lent in the UK is directed at financial institutions and real estate with obvious negative implications for leverage, growth, stability and income inequality.

Conclusion

The fact that UK corporates are accessing finance in larger volumes and at lower costs is welcome. Nonetheless, the widening gap between large corporate and SME financing is of concern as is the fact that UK lending remains concentrated in less-productive FIRE-based lending. This week’s Bank of England data contained good news for sure, but not to the extent that headline numbers might suggest.

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

“Messages from the money sector II”

Risks to the V-shaped recovery narrative?

The key chart

The key messages

Analysing trends in monetary aggregates in unlikely to top the list of most people’s “things to do” during the Covid-19 lockdown period. Nonetheless, these trends provide investors with important messages from the money sector regarding developments in the wider economy.

The annual growth rate in broad money (M3) jumped to 8.3% in April, the fastest rate of YoY growth since October 2008. Narrow money (M1), comprising overnight deposits and currency in circulation, rose 11.9% (the fastest rate of annual growth since December 2009) and contributed 8.0ppt of the total growth in M3.

Reflecting heightened uncertainty, households (HHs) and corporates (NFCs) are demonstrating strong preferences for liquidity – €9.5trillion is currently sitting in (cash and) overnight deposits. This is despite negative real rates on overnight deposits.

From a counterparts perspective, credit to the private sector grew 4.9% in April and contributed 4.8ppt to the growth in M3, albeit it with increasingly divergent HH and NFC dynamics. The demand for NFC credit is growing at the fastest rate since March 2009, although last month’s “dash for cash” did not continue. In contrast, the demand for HH credit is slowing, driven by a sharp slowdown in consumer credit.

Heightened uncertainty, strong liquidity preference and sharply slowing consumption all represent on-going risks to the “v-shaped” recovery narrative.

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

Six charts that matter

**M3 growth driven by strong demand for overnight deposits (YoY growth in M3 broken down by component)**
Source: ECB; Haver; CMMP analysis

**Liqudity preference – EURO 9.5trillion sitting in (cash and) overnight deposits despite negative real returns (Euro billions)**
Source: ECB; Haver; CMMP analysis

**Credit to the private sector is an important counterpart of M3, contributing 4.8ppt to total growth**
Source: ECB; Haver; CMMP analysis

**But the demand for credit continues to lag money supply reflecting the on-going impact of the debt overhang in the EA**
Source: ECB; Haver; CMMP analysis

**Trends in NFC and HH credit demand are diverging at a greater rate (loan growth, % YoY)**
Source: ECB; Haver; CMMP analysis

**The slowdown in HH credit driven by much slower growth in consumer credit (loan growth, % YoY)**
Source: ECB; Haver; CMMP analysis

“Messages from the money sector”

March’s three key messages

The key chart

**The first key message – strong growth in overnight deposits drives the fastest growth in M3 since the GFC (% YoY, breakdown by component of M3)**
Source: ECB; Haver; CMMP analysis

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.

**After a period of relatively stability, M3 spiked higher in March 2020 (% YoY)**
Source: ECB; Haver; CMMP analysis

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.

**EURO 9.3trillion is sitting in cash and overnight deposits despite negative real rates (EUR bn)**
Source: ECB; Haver; CMMP analysis

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.

**Counterparts of M3 – credit to the private sector an important counterpart (% YoY, breakdown by counterpart)**
Source: ECB; Haver; CMMP analysis

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).

**What is driving the spike in PSC growth? (% YoY)**
Source: ECB; Haver; CMMP analysis

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.

**Divergent trends in NFC and HH sectors in March (loan growth,% YoY)**
Source: ECB; Haver; CMMP analysis

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.”

**The second key message – 1Q20 monthly NFC flows broken down by maturity (EUR bn)**
Source: ECB; Haver; CMMP analysis

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”.

**The third key message – 1Q20 monthly HH flows broken down by segment (EUR bn)**
Source: ECB; Haver; CMMP analysis

**Longer term trends in mortgage and consumer credit growth (% YoY)**
Source: ECB; Haver; CMMP analysis

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.

“Amber warnings in EA?”

Leading, coincident and lagging indicators have peaked

The key chart

**Watch this space – leading (real M1), coincident (real HH) and lagging (real NFC) indicators have all peaked, but remain well above the levels associated with recessions risks (% YoY, real terms).**
Source: ECB; Haver; CMMP analysis

The key message

January’s monetary developments data for the euro area (EA) presented no surprises. Monetary aggregates are still growing well above the levels associated with heightened recession risks.

Broad money (M3) growth increased to 5.2% from 4.9% in December 2019. Narrow money (M1) remains the main component, contributing 5.3% to this growth (other ST deposits being the negative balancing item) and accounting for 69% of the outstanding stock of M3. There is now just under €9trillion residing in (cash and) overnight deposits despite negative real rates, indicating an enduring debt overhang in the region.

Private sector credit grew 3.8% YoY, a new high in nominal terms in the current credit cycle, but lags the growth in the supply of money, reflecting the on-going deficiency in credit demand.

However, an early warning sign is flashing within the context of my money, credit and business cycle framework. Growth rates in real M1 (a leading indicator), real HH credit (a coincident indicator) and real NFC credit (normally a lagging indicator) have all peaked at the aggregate level and in Germany and France, the two markets that have driven loan growth in the region. None of these indicators imply recession risks, but they do point to a slowdown in economic activity across the euro area. Watch this space…

The charts that matter

**No headline surprises – broad money (M3) grew 5.2% in January versus 4.9% in December (% YoY, nominal terms)**
Source: ECB; Haver; CMMP analysis

Growth trends and breakdown of M3 by component – overnight deposits (red bars) remain the key driver of money supply growth. M1 contributed 5.3% of the total 5.2% M3 growth, other ST deposits were the negative balancing item **(% YoY, nominal terms)**
Source: ECB; Haver; CMMP analysis

**Confirmation of the enduring debt overhang – c Euro 9 trillion sitting in (cash and) overnight deposits despite negative real returns (Euro billions)**
Source: ECB; Haver; CMMP analysis

M3 = credit to EA residents + net external assets – LT financial liabilities + other counterparts

From a counterparts perspective, and on a positive note, credit to other EA residents (the purple bars) has replaced credit to central government (the green bars, QE impact) as the main driver of M3 (%YoY, nominal terms)
Source: ECB; Haver; CMMP analysis

**Early warnings #1 – real growth in M1 (leading indicator) has fallen from recent peak of 7.3% in November 2019 to 6.8% in January (% YoY, 3m MVA)**
Source: ECB; Haver; CMMP analysis

**Early warnings #2 – real growth in HH credit (co-incident indicator) has also fallen from recent peak of 2.6% in November 2019 to 2.3% in January (% YoY, 3m MVA)**
Source: ECB; Haver; CMMP analysis

**Early warnings #3 – real growth in NFC credit (typically a lagging indicator) peaked at 3.0% in October 2019 and has fallen to 2.0% in January (% YoY, 3m MVA)**
Source: ECB; Haver; CMMP analysis

Germany is the second largest contributor to EA HH credit growth after France – growth hit a new peak of 4.5% in January in nominal terms, but has fallen from 3.4% in October 2019 to 2.9% in January in real terms **(% YoY)**
Source: ECB; Haver; CMMP analysis

Germany is the largest contributor to EA NFC credit growth. Nominal growth rates peaked at 7.0% in June 2019 and have fallen to 5.0% in January. Real growth rates peaked at 5.6% in August 2019 and have fallen to 3.3% in January (% YoY)
Source: ECB; Haver; CMMP analysis

France is the largest contributor to EA HH credit growth – in nominal terms, growth hit a new high of 6.5% in January, but peaked in real terms at 5.4% in October 2019 and has fallen to 4.7% in January
Source: ECB; Haver; CMMP analysis

France is the second largest contributor to EA NFC credit growth after Germany – nominal growth rates have fallen from 8.3% in August 2019 to 5.7% in January and real rates have fallen from 6.9% to 3.9% over the same period
Source: ECB; Haver; CMMP analysis

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

chris@cmmacroperspectives.com

“Follow the Euro-money”

2019’s end-of-year message

The key chart

**Leading (real M1), coincident (real HH) and lagging (real NFC) indicators moved further away from the levels associated with recession risks in the euro area during 2019 (% YoY, real terms)**
Source: ECB; Haver; CMMP analysis

The message from 2019

Monetary indicators moved away from the levels associated with recession risks in the euro area (EA) during 2019.

A very brief summary

Nominal growth rates in narrow money (M1), broad money (M3) and private sector credit (PSC) ended the year at, or close to, 12-month highs and well above the levels recorded in 2018. In real terms, M1 grew 6.6% in 2019 versus 5.0% in 2018 (with a 2019 high of 7.6% in October). Given the leading indicator qualities of trends in real M1, this data supports the narrative that recession fears in the EA have been overdone. Household credit (a coincident indicator) grew at 3.7% in nominal terms, the fastest rate in the current cycle and 2.4% in real terms. The main inconsistency in this data was the slowdown in NFC lending over 2019 particularly in the final months (trends in real NFC credit are typically considered lagging indicators).

These positive trends were offset by three counterbalancing trends: (1) while PSC growth ended 2019 close to its high, current growth remains subdued in relation to LT trends; (2) the demand for credit continues to lag the supply of money which indicates that the EA has still to recover fully from the debt overhang; and (3) ECB policies are fuelling growth in less-productive FIRE-based lending (see “The ECB’s missing chart“) with potentially negative implications for leverage, growth, financial stability, and income inequality.

The charts that matter

**Growth rates in narrow money (M1), broad money (M3) and private sector credit (PSC) ended the year at, or close to, 12-months highs** **(% YoY, nominal terms)**
Source: ECB; Haver; CMMP analysis

**Leading indicator – real M1 grew 6.6% YoY in 2019 versus 5.0% YoY in 2018** **(% YoY in real terms)**
Source: ECB; Haver; CMMP analysis

**Co-incident indicator – real HH credit growth of 2.4% , driven by sustained mortgage demand (% YoY in real terms)**
Source: ECB; Haver, CMMP analysis

**Lagging indicator – the slowdown in real NFC credit in 4Q19 was inconsistent with other trends (% YoY in real terms)**
Source: ECB; Haver; CMMP analysis

**PSC credit growth ended the year on a high, but remains subdued in relation to LT trends (% YoY 3m MVA in nominal terms)**
Source: ECB; Haver; CMMP analysis

**Deficient demand – private sector credit demand lags the supply of money. The EA has still to recover fully from the debt overhang** **(% YoY 3m MVA in nominal terms)**
Source: ECB; Haver; CMMP analysis

**Fueling the FIRE – ECB policies are supporting growth in less-productive FIRE-based lending with potentially negative implications for leverage, growth, financial stability, and income inequality** **(% total EA loans)**
Source: ECB; Haver; CMMP analysis

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

“Fading recession risks?”

A short update from the Euro Area monetary sector

The key chart

**Real growth in M1 (leading indicator), HH credit (coincident indicator) and NFC credit (lagging indicator) continue to move away from levels associated with recession risks in the Euro Area**
Source: ECB; Haver; CMMP analysis

The message from October’s data

Monetary indicators continue to move away from levels associated with recession risks in the Euro Area.

**Leading indicator: Growth in real M1 has rebounded and is at the highest level since October 2017**
Source: ECB; Haver; CMMP analysis

Narrow money (M1) grew 8.4% in nominal terms in October, up from 7.9% in September. In real terms, M1 grew 7.6% which is the fastest rate of real growth since October 2017 (8.0%) and compares with a real growth rate of only 4.7% in January this year. Given the leading indicator qualities of trends in real M1, this data supports the narrative that recession fears in the Euro Area have been overdone.

**Coincident indicator: Real growth in HH credit at its highest level since April 2008**
Source: ECB; Haver; CMMP analysis

Households and corporates are also increasing their borrowing at the fastest rates in the current cycle. HH credit (a co-incident indicator) grew 3.5% in nominal terms and 2.8% in real terms, the fastest rate of real growth since April 2008. NFC credit (a lagging indicator) grew at 3.8% in nominal terms and 3.1% in real terms. The real growth was marginally below the level of 3.2% recorded in August 2019, but again these rates are the highest real growth rates since June 2009.

**Lagging indicator: Real NFC growth at/close to its highest level since June 2009**
Source: ECB; Haver; CMMP analysis

Of course, credit growth remains relative subdued in relation to LT trends and concentrated geographically (HH in France, Germany, Benelux and Italy; NFC is France, Germany and Austria) and the demand for credit continues to lag the supply of money which indicates that the Euro Area has still to recover fully from the debt overhang (see graph below).

**Don’t get carried away – the demand for credit from the private sector (PSC) still lags the supply of money. The Euro Area continues to suffer from a deficiency in the demand for credit.**
Source: ECB; Haver; CMMP analysis

A simple conclusion

Nonetheless, the message from October is simple: current monetary trends remain inconsistent with recession fears in the Euro Area

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

“Look beyond the yield curve II”

Monetary trends remain inconsistent with recession fears in the Euro Area

Messages from the money sector

**Narrow money (M1) and broad money (M3) growth accelerates in August 2019**
Source: ECB; Haver; CMMP

Earlier this month, I argued that (1) leading indicators were giving mixed messages about recession risks in the Euro Area; (2) that monetary indicators were comfortably above the levels the ECB associate with risks of recession; but (3) that the ECB was still expected to cut rates and to restart QE.

No surprises since then from the ECB. However, monetary indicators have moved even further away from levels associated with recession risks. Growth in real M1 (a leading indicator) accelerated in August, and real growth in household credit (a coincident indicator) and corporate credit (a lagging indicator) are at the highest levels in the current credit cycle. The message from the money sector in August is that current trends remain inconsistent with recession risks in the Euro Area.

No surprises from the ECB in September

The Deposit Facility Rate was cut from minus 0.4% to 0.5% in-line with expectations at this month’s meeting. The ECB also announced that it would restart buying €20bn of bonds per month until inflation hits its target of 2%. It also introduced a new “tiered” system of interest rates to reduce the cost to banks from negative rates (as discussed in “Power to the Borrowers”). No surprises here.

What are monetary developments telling us?

To recap, growth rates in real M1 and lending to the private sector demonstrate robust relationships with the business cycle through time. Real M1 tends to lead fluctuations in real GDP with an average lead time of four quarters. Real household (HH) credit growth tends to lead slightly (one quarter) or have a coincident relationship with real GDP. In contrast, real corporate (NFC) credit tends to lag fluctuations in real GDP with a lag of three quarters.

**Growth in real M1 (my preferred leading indicator) is rising well above the levels associated with recessions in the Euro Area (% YoY, 3m MVA)**
Source: ECB; Haver; CMMP calculations

Monetary indicators moved even further away from levels associated with recessions risks in August. Real M1, an alternative leading indicator with a stronger and more stable relationship with real GDP than the slope of the yield curve, grew 7.3% in August compared with 6.7% in July and 4.7% in January this year. This is the fastest rate of real growth in narrow money since January 2018.

**Growth in real HH credit (a leading/coincident indicator) is at the highest level in the current credit cycle (% YoY, 3m MVA)**
Source: ECB; Haver; CMMP calculations

**Nominal HH credit growth driven by France, Germany, Benelux and Italy – but remains subdued in relation to past cycles (%YoY)**
Source: ECB, Haver, CMMP calculations

Real HH credit (a leading/co-incident indicator) and Real NFC credit (a lagging indicator) grew at 2.4% and 3.3% respectively. In both cases, this was the fastest rate of growth in the current credit cycle. France (1.3%), Germany (1.2%), Benelux (0.3%) and Italy (0.2%) were the main contributors to HH credit growth (contributions here are in nominal terms).

**Growth in real NFC credit (a lagging indicator) is also at the highest level in the current credit cycle (% YoY, 3m MVA)**
Source: ECB; Haver, CMMP calculations

In the NFC sector, France (1.8%) and Germany (1.5%) were again the main country drivers, but Italy (-0.6%) and Spain (-0.2%) both made negative contributions to nominal Euro Area growth rates.

**Nominal growth in NFC credit still dominated by France and Germany while Spain and Italy make negative contributions (% YoY)**
Source: ECB; Haver; CMMP calculations

The message from the money sector in August is that current trends remain inconsistent with recession risks in the Euro Area. The domestic sectors are demonstrating resilience in contrast to the contraction seen in the more export-oriented manufacturing sectors. The latest trends remain supportive of current ECB and EC forecasts which point to a shallow recovery in growth in 2H19.

**Monetary trends are more supportive of current EC (and ECB) forecasts for a shallow recovery in growth (% YoY)**
Source: EC; Haver; CMMP

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

“Look beyond the yield curve”

Leading indicators are giving mixed messages – but the ECB is still expected to cut rates and restart QE

**Mixed messages 1: The inverted 10Y-3M yield curve raises “recession risks” concerns**
Source: ECB; Haver; CMMP

Turning points in the slope of the yield curve typically lead turning points in real Euro Area (EA) GDP. The rapid flattening/inverting of EA yield curves YTD has surpassed trends seen in 2015 and 2016 and raises concerns that “recession risks” are rising across the region.

**Mixed messages 2: Real growth in EA narrow money (an alternative leading indicator)** **remains well above the levels associated with recessions**
Source: ECB; Haver; CMMP

To assess the severity of these risks, I examine trends in the key leading, co-incident and lagging indicators that represent the foundation of my “Money, Credit and Business Cycle” framework.

Growth rates in real M1 and lending to the private sector demonstrate robust relationships with the business cycle through time.

Real M1 tends to lead fluctuations in real GDP with an average lead time of four quarters. This reflects the fact that M1 is composed of funds that businesses and households can access quickly to support current spending.

Real household (HH) credit growth tends to lead slightly (one quarter) or have a co-incident relationship with real GDP. HHs typically increase their demand for credit when they expect house prices to recover and after house prices and interest rates have declined during a slowdown.

In contrast, real corporate (NFC) credit tends to lag fluctuations in real GDP with a lag of three quarters. NFCs typically rely on in internal sources of funds at the early stage of an economic recovery before turning to banks (and other external sources) for financing at later stages.

**Leading indicator: growth in EA real GDP and real M1 (% YoY)**
Source: ECB; Haver; CMMP

Real M1, an alternative leading indicator with a stronger and more stable historic relationship with real GDP than the slope of the yield curve, rebounded in February 2019 and is now growing at the fastest rate since February 2018. The relationship between real growth in M1 and real growth in GDP is well documented and is supported by CEPR evidence that shows that the real growth rate in M1, “went well into negative territory for prolonged period just before (or in coincidence with) all historic EA recessions.” (ECB Economic Bulletin, April 2019).

Real growth rates in M1 peaked back at 11.1% back in November 2015, but the moderation became more obvious during 2018 with a recent low of 4.3% in August 2018. A more sustained recovery began in February 2019 and the current (July 2019) growth rate of 6.7% is the fastest rate since February 2018. The current level of real M1 growth remains comfortably above the levels that the ECB associates with risks of recession in the near future.

**Leading/coincident indicator: growth in EA real GDP and real household credit (% YoY)**
Source: ECB; Haver; CMMP

**Lagging indicator: growth in EA real GDP and real corporate credit (% YoY)**
Source: ECB; Haver; CMMP

Real growth rates in HH credit (a leading/coincident indicator) and NFC credit (a lagging indicator) are also at their highest levels in the current credit cycle. According to ECB data released last week, HH credit grew 3.4% YoY in nominal terms and 2.4% in real terms in July 2019. This is the fastest rate of growth since July 2009 and the fastest rate of growth in the current cycle. France (1.4% contribution), Germany (1.2%), Benelux (0.3%) and Italy (0.2%) were the main drivers of growth. NFC lending grew 3.9% YoY in nominal terms and 2.9% in real terms. Again the real growth rate was the fastest in the current cycle and the fastest rate of growth since June 2009. In the NFC sector, France and Germany are again the key country drivers, both contributing 1.7% of total nominal growth.

In other words, the message from the EA banking sector is more consistent with current ECB and EC growth (subdued but stable) forecasts than with fears of an EA recession.

**Real GDP growth in Euro Area showing current EC 2019-2020 forecasts (% YoY)**
Source: ECB; EC; Haver, CMMP

However, with growth remaining below LT trends and with inflation 1ppt below the ECB’s target, expectations that the ECB will cut rates this month and restart QE are likely to be met.

**Euro Area inflation (HICP) remains well below the ECB target of 2% (% YoY)**
Source: ECH; Haver; CMMP

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