Mixed messages from the US money sector at the end of 2023
The key chart
Long term trends in US consumer credit ($bn) (Source: FRED; CMMP)
The key message
The US money sector sent mixed messages about the outlook for consumption and growth at the end of 2023.
The outstanding stock of consumer credit recorded a new “round number” of $5tr in November 2023, albeit it with a (nominal) rate of growth below its long term trend (see key chart).
Monthly flows ($bn) in US consumer credit (Source: FRED; CMMP)
CMMP Analysis has been following the recent slowdown in monthly flows of consumer credit with interest.
November 2023 saw a reversal of this trend, however. The monthly flow of consumer credit jumped to $24bn, from $6bn in October 2023 and $11bn in September 2023. November’s monthly flow also exceeded the pre-pandemic average flow of $15bn for the first time since May 2023 (see chart above).
The 3m MVA of monthly flows rose to $13bn in November 2023 from under $1bn in October 2023 but remained below its pre-pandemic average of $15bn.
So what?
It is dangerous to read too much into one month’s data release but for now, at least, the message from the money sector is that the “cracking US consumer” narrative is currently on hold….
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.
Why are Canadian commentators typically more bearish on the outlook for US households?
The key chart
Diverging trends in US and Canadian HH debt service ratios and affordability risks (Source: BIS; CMMP)
The key message
My Canadian friends typically recoil when being mistaken for Americans – and understandably so. They have their own unique nationality, heritage and culture. Despite being close geographical neighbours, they have their own unique experiences too. At the same time, my American friends may recoil when Canadian economic and market commentators allow their own domestic experiences to distort their outlook for US household sector vulnerabilities. Again, understandably so – they each have their own unique experiences.
Confusing Canadians and Americans is rarely a good idea…
For the rest of us the message is clear. Among developed economies, affordability risks are at their highest in Canada, Switzerland, Sweden and France (Lesson #2 from the money sector in 2023). Ignoring key structural shifts in US HH dynamics is a mistake as those who underestimated the resilience of the US consumer found out to their cost last year.
The dangers of confusing Canadians and Americans
Twenty year trends in US and Canadian HH debt ratios (Source: BIS; CMMP)
Note that the US household (HH) debt ratio peaked at 99% GDP back in December 2007 (see chart above). It is now 74% GDP, below the 85% GDP threshold level above which the BIS considers debt to be a constraint on future growth. The Canadian HH debt ratio only peaked 13 years later at 113% GDP in December 2020. It is now 103% GDP, still well above the BIS threshold level.
Twenty year trends in US and Canadian HH RGFs (Source: BIS; CMMP)
The rate of “excess credit growth” (or relative growth factor) – where the 3Y CAGR in debt is above the 3Y CAGR in nominal GDP – peaked in the US at 6.6ppt back in March 2004. In Canada, the rate of excess credit growth did not peak until December 2009 at 7.7ppt. There is one similarity here, however. In both economies, the relative growth factors are currently negative (see chart above).
Diverging trends in US and Canadian HH debt service ratios and affordability risks (Source: BIS; CMMP)
This matters because HH sector vulnerabilities with respect to “affordability risks” are very different in these economies. The HH debt service ratio (DSR) in the US is currently 7.7%. This is 3.9ppt below its historic high of 11.6% and 1.5ppt below its long-term average of 9.2%. In sharp contrast, the HH DSR in Canada is at a record high of 14.4%, 2.1ppt above its long-term average of 12.3%.
Conclusion
Confusing Canadians and Americans is rarely a good idea…
Among developed economies, affordability risks are at their highest in Canada, Switzerland, Sweden and France (Lesson #2 from the money sector in 2023). Ignoring key structural shifts in US HH dynamics is a mistake as those who underestimated the resilience of the US consumer found out to their cost last year.
Happy New Year!
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.
The UK private sector debt ratio is back to March 2002 levels
The key chart
Trends in UK private sector debt ratio (% GDP, RHS) and relative growth versus nominal GDP (3Y CAGR %, LHS) (Source: BIS; CMMP)
The key message
Don’t whisper it softly this time – shout it out loudly instead:
…the UK private sector debt ratio is back to March 2002 levels
This matters because neither Jeremy Hunt (the current UK Chancellor) nor Rachel Reeves (his likely successor) appear to recognise the folly of combining austerity with private sector deleveraging (“pre-COVID Britain”). The next election will be fought on the wrong macro battleground as a result.
According to the latest BIS data release, the UK private sector’s debt ratio was 147% GDP at the end of 2Q23, down from its all-time high of 186% GDP in 1Q10 and its recent high of 177% GDP in 1Q21 (see key chart above).
The corporate sector debt ratio has fallen from 90% GDP in 4Q08 to 66% GDP in 2Q23, while the household sector debt ratio has fallen from 98% GDP in 4Q09 to 81% in 2Q23. The UK now joins the US, Germany and Italy among the small group of advanced nations where both sector’s debt ratios are below the BIS threshold limits, above which debt is considered a drag on future growth.
Note that the private sector’s share of total UK debt has fallen from almost 80% at the time of the GFC to 62% now. In short, the UK has followed the US in substituting higher-risk household debt with lower risk government debt since the GFC.
As the UK approaches a general election next year, the macro policy debate should be around:
UK banking is geared currently towards less-productive FIRE-based lending that supports capital gains rather than productive COCO-based lending that supports investment, production and income formation. UK banking also fails SMEs – the lifeblood of the UK economy. Only 22 pence in every pound lent in the UK is for productive purposes and only 7 pence is lent to SMEs. This is despite the fact that SMEs account for 50% of private sector turnover and 60% of employment.
Equally troubling, the UK policy debate focuses on reducing the level of government borrowing further based on the flawed narrative that governments face the same financial constraints as households and equally flawed macro thinking that sees public debt as a problem while largely ignoring private debt. The irony for “post-Brexit” Britain is that this leaves us increasingly dependent on financial flows from the RoW. A depressing thought at the end of the year.
Time for shouting not whispering…
Please note that summary comments and chart above are abstracts from more detailed analysis that is available separately.
The “emerging market” classification has been redundant for some time now
The key chart
Trends in market share (%) of global debt since June 2009 (Source: BIS; CMMP)
The key message
Whisper it softly; the “emerging market” (EM) classification has been redundant for some time now.
CMMP analysis has questioned the relevance and usefulness of the “emerging market” classification for some time. The latest BIS data release, merely supports this view, at least from a debt perspective.
EM’s share of global debt has increased from 18% in June 2009 (at the time of the GFC) to 40% in June 2023 – a remarkable structural shift (see key chart above).
Over this period the EM debt ratio has risen from 97% GDP to 156% GDP, and is now only 6ppt below the debt ratio of so-called “advanced” of “developed markets” (DM).
For reference, the DM debt ratio has fallen from 174% GDP at the beginning of this period and from its all-time high of 183% GDP in 4Q20.
These dynamics have supported a popular investment narrative called, “The EM-debt story”.
In my previous post, however, I noted that all sectors of the Chinese economy are increasing their levels of indebtedness and that all their debt ratios hit new highs in 2Q23 (see “Whisper it softly – Part III“).
The key point here is that if we strip out China, EM’s shares of global debt has only increased slightly since the GFC, from 10% to 13%.
What this means is that rather than witnessing an EM-debt story, we have, in fact, been witnessing “The China-debt story” since the GFC.
So what?
While the EM classification remains convenient, it is increasingly less relevant and/or helpful in terms of understanding the impact of global debt dynamics on macro policy, investment decisions and financial stability.
Please note that the summary comments and chart above are abstracts from more detailed analysis that is available separately.
All sectors of the Chinese economy are increasing leverage still, but…
The key chart
Trends in “excess credit growth” in China since June 2013 (Source: BIS; CMMP)
The key message
Whisper it softly (III), but all sectors of the Chinese economy are increasing their levels of indebtedness still.
The Chinese government is the main driver here, rather than the private sector, however. The rate of private sector “excess credit” generation has slowed markedly (see key chart above). With a (private sector) balance sheet recession still a risk (if not a reality yet), these trends can be expected to continue.
According to the latest BIS date release, China’s total, government, household (HH), corporate (NFC) and private sector (PS) debt ratios all hit new highs in 2Q23 (308%, 79%, 62%, 166% and 228% GDP respectively). China now accounts for 23% of total global debt, 26% of global PS debt and 32% of global NFC debt. In June 2009, these shares were only 7%, 8% and 12% respectively.
A key dynamic to note here, however, is the rate of growth in debt or “excess credit” generation. At times, this can be as important, if not more important than the level of debt/indebtedness. The key chart above illustrates the 3Y CAGR in government, HH and NFC debt in relation to the 3Y CAGR in nominal GDP.
Three distinct phases are visible – the first (1) includes the period of excess HH, NFC and government credit growth; the second (2) includes the period of excess HH and government debt, and the third (3 and current phase) includes excess government credit growth but much slower rates of HH and NFC excess credit growth.
At the start of 2023, I posed the question, “what if China’s private sector turns to debt minimisation/savings maximisation instead?” Or, “what if China experiences as balance sheet recession?”
As noted later in September 2023, the “balance sheet recession” story is still on hold, at least for the time being. Although it did become part of the 1H23 investment narrative briefly. Nonetheless, the dynamics of money creation and potential growth are shifting clearly. Credit rating agencies may (mistakenly) wish to see lower levels of government debt in China, but if current dynamics continue it will be fiscal policy/government spending that will have to do the “heavy lifting” if China’s growth is to recover.
Please note that the summary comments and chart above are abstracts from more detailed analysis that is available separately.
US private sector indebtedness is largely unchanged over the past two decades
The key chart
Trends in US private sector debt ratio (% GDP, RHS) and relative growth versus nominal GDP (3Y CAGR %, LHS) (Source: BIS; CMMP)
The key message
Whisper it softly, but the level of US private sector INDEBTEDNESS is largely unchanged over the past TWO DECADES.
According to the latest BIS data release, the private sector debt ratio was 150% GDP at the end of 2Q23, down from its all-time peak of 170% GDP (3Q08) and its recent “pandemic-peak” of 162% GDP (4Q20). For reference, the debt ratio was 149% GDP at the end of 2Q03 (see key chart above).
The absolute level of debt reached a new high ($39.9tr) in 2Q23, however, re-enforcing the difference between the level of debt and the level of indebtedness. A key distinction that is often overlooked in popular, but flawed, US debt narratives.
Over the past three years, private sector debt has grown at a CAGR of 5.6%. Nominal GDP has grown at a CAGR of 7.6% over the same period. This negative “relative growth factor” is illustrated when the blue shaded area in the key chart above falls below the x-axis.
Note that over the past two decades, private sector debt has fallen from 73% of total US debt to 60% of total US debt. Lower-risk, government debt substituted for higher-risk household debt as the private sector embarked on a period of passive deleveraging post-GFC. The US led the advanced world in this important development.
The household debt ratio has fallen from its 1Q08 peak of 98% GDP to 74% GDP at the end of 2Q23. The corporate sector debt ratio has fallen from its 1Q21 peak of 84% GDP to 77% GDP at the end of 2Q23.
So what?
The US is one of only three advanced economies that has both household and corporate debt ratios BELOW the BIS threshold limits above which debt becomes a constraint on future growth. How often is this part of US debt narratives?
Viewed in this context, and recognising the distinction between the level of debt and the level of indebtedness, the resilience of US consumption and growth in the face of unprecedented monetary tightening becomes less surprising…
Please note that the summary comments and chart above are abstracts from more detailed analysis that is available separately.
UK and EA consumers are still borrowing, despite higher rates
The key chart
Quarterly flows in UK and EA consumer credit (multiple of pre-pandemic flows) (Source: BoE; ECB; CMMP)
The key message
The Bank of England and ECB both argue that, (1) the best way they can make sure inflation comes down and stays down is to raise rates, and (2) that higher rates make it more expensive to borrow and hence people will spend less on goods on services.
Great in theory, but consumer credit flows have remained surprisingly strong during 3Q23 and in September 2023 when monthly flows in both regions were 1.2x their average pre-pandemic levels.
While unprecedented increases in the cost of borrowing have resulted in a very sharp slowdown in overall financing flows to the UK and EA private sectors, consumers in both regions are “still bashing the plastic”.
Bad news for investment and real estate, perhaps, but better news for consumer goods and services (at least for now).
And yet
“Higher interest rates make it more expensive for people to borrow money and encourages them to save. That means that, overall, they will tend to spend less. If people on the whole spend less on goods and services, prices will tend to rise more slowly. That lowers the rate of inflation”
Bank of England, 2 November 2023
UK consumer credit flows
UK consumer credit flows totalled £4.4bn in 3Q23, up from £4.3bn in the 2Q33, but down from £4.5bn in 1Q23 (see key chart above). Consumer credit flows in the past three quarters have been 1.2x their average pre-pandemic level of £3.6bn.
Trends in UK monthly consumer credit flows (Source: BoE; CMMP)
Monthly consumer credit flows during the 3Q23 were £1.3bn in July, £1.7bn in August, and £1.4bn in September. These resilient flows were 1.1x, 1.4x and 1.2x the average monthly pre-pandemic flow of £1.2bn (see chart above).
EA consumer credit flows
EA consumer credit flows totalled €9.3bn in 3Q23, up from €3.4bn in 2Q23 and €4.2bn in 1Q23. Consumer credit demand, which had been supressed since the pandemic, almost recovered to its pre-pandemic average level of €10.3bn.
Trends in EA monthly consumer credit flows (Source: ECB; CMMP)
Monthly consumer credit flows during the 3Q23 were €2.5bnbn in July, £3.0bn in August, and £3.9bn in September. These flows were 0.7x, 0.9x and 1.2x the average monthly pre-pandemic flow of €3.4bn (see chart above).
Conclusion
While unprecedented increases in the cost of borrowing have resulted in a very sharp slowdown in overall financing flows to the UK and EA private sectors, consumers in both regions are “still bashing the plastic”.
Bad news for investment and real estate, perhaps, but better news for on-going demand for goods and services.
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.
(Some) things may not be getting worse, but significant financing challenges remain
The key chart
Trends in net lending flows to UK SMEs (Source: BoE; CMMP)
The key message
There was little for UK SMEs to cheer in the latest “Money and Credit” data release from the Bank of England. The only positives for this systemically important economic sector were: (1) monthly negative financing flow dynamics did not get worse; and (2) the average cost of borrowing fell slightly.
SMEs have been repaying bank loans and overdrafts since October 2022. In September 2023, net repayments totalled -£284m, less than -£747m in August and -£1,184m in July
Cumulative flows in the twelve months to September 2023 increased to -£9.9bn from -£9.2bn and -£8.8bn in August and July respectively, however
Note that lending to real estate activities (that involve buying, selling and renting of own or leased real estate) is the only sub-sector to experience positive 12-month cumulative lending flows (£0.3bn in September 2023). With monthly repayments in four of the past six months, these cumulative flows are slowing sharply now, reflecting wider challenges for the sector
The average cost of borrowing for SMEs fell slightly from 7.65% in August to 7.59% in September 2023. Nonetheless, the 514bp increase in the cost of borrowing since the Bank of England began tightening is still larger than for all corporates (460bp to 6.63%), secured HH borrowing (343bp to 5.01%) an unsecured HH borrowing (246bp to 8.73%).
In short, and to repeat recent messages, UK SMEs continue to face significant systemic and cyclical financing challenges that limit their ability to invest fully in growth, job creation and innovation. Are the UK government and the Bank of England watching carefully enough…?
Little to cheer for UK SMEs
Trends in net lending flows to UK SMEs (Source: BoE; CMMP)
SMEs have been repaying bank loans and overdrafts since October 2022. In September 2023, net repayments totalled -£284m, compared with -£747m in August 2023 and -£1,184m in July 2023 (see columns in chart above).
Cumulative flows in the twelve months to September 2023 increased to -£9.9bn from -£9.2bn and -£8.8bn in August 2023 and July 2023 respectively (see dotted line in chart above).
Trends in net lending flows to key RE sub-sector (Source: BoE; CMMP)
Dynamics in the two sectors that have the largest market shares of total loans – real estate (41% share) and trade (9% share) – matched the overall sector dynamics (unsurprisingly given their size).
Note however that real estate comprises two subsectors: the first and largest involves buying, selling and renting of own or leased real estate; the second (much smaller) involves real estate activities on a fee or contractual basis.
The former is the only sub-sector within SME lending to experience positive 12-month cumulative lending flows (£0.3bn in September 2023). With monthly repayments in four of the past six months, these cumulative flows are slowing sharply now reflecting wider challenges for the UK real estate sector (see chart above).
Trend in the average cost of borrowing for UK SMEs (Source: BoE; CMMP)
The average cost of borrowing for SMEs fell slightly from 7.65% in August 2023 to 7.59% in September 2023 (see chart above). Nonetheless, the 508bp increase in the cost of borrowing since the Bank of England began tightening is still larger than the average costs of borrowing for all corporates (460bp to 6.63%), secured HH borrowing (343bp to 5.01%) an unsecured HH borrowing (246bp to 8.73%).
Changes in the cost of borrowing since BoE tightening began by sector (Source: BoE; CMMP)
Conclusion
To repeat last month’s message – SME’s access to finance is systemically important to the UK economy. Broad-based weakness in lending across all SME sectors or industry groups is concerning, therefore. It supports the hypothesis that SMEs are putting both investment and business development on hold.
In short, current financing conditions are limiting SMEs’ ability to invest fully in growth, job creation and innovation. Are the UK government and the Bank of England watching carefully enough…?
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.
Financing flows to the UK private sector slowing very sharply
The key chart
Trends in cumulative financing flows to the UK private sector (12-months, £bn) (Source: BoE; CMMP)
The key message
The latest “Money and Credit – September 2023” data release from the Bank of England (BoE) confirms the sharp slowdown in financing flows to the UK private sector. This story is not unique to the euro area.
Cumulative monthly financing flows fell from £98bn in the 12 months to September 2022 to net repayments of £64bn in the twelve months to August 2023 (see key chart above). This data includes volatile flows to non-intermediating financial companies (the green columns). Excluding these, financing flows to corporates (PNFCs) and HHs fell from £64bn to £11bn over the period.
The average cost of borrowing for PNFCs has increased 460bp from 2.03% in December 2021 (when BoE rate increases began) to 6.63% in September 2023. In response, PNFCs have repaid loans in six of the past twelve months and cumulative 12-month financing flows have been negative for the past nine months. Behind the headlines, UK SMEs also face the extra “dual challenge” of lower lending volumes (negative YoY growth since August 2021) and even higher borrowing costs (7.59% average, up 508bp since December 2012).
The average costs of secured and other HH lending have increased by 343bp (from 1.58% to 5.01%) and 246bp (from 6.27% to 8.73%) respectively over the same time-period. HHs have repaid loans in three of the past six months and cumulative 12-month financing flows have declined from £60bn in the 12 months to September 2022 to £17bn in the twelve months to August 2023.
So what?
As noted in previous posts, the BoE and the ECB both lack playbooks for such aggressive periods of monetary tightening. Financing flows to the UK and EA private sectors are falling sharply and reaching a potential “choke point” for growth and much-needed investment.
Central bankers may argue that this suggests that the transmission of monetary policy is working. Others might view such as rapid pace of adjustment as an indicator that the risks of policy errors and risks to future growth are rising very sharply…
Tightening the UK choke hold further
The latest “Money and Credit – September 2023” data release from the Bank of England (BoE) confirms the sharp slowdown in financing flows to the UK private sector. This story is not unique to the euro area.
The collapse in cumulative 12-month financial flows to the UK private sector (12 months to September, £bn) (Source: BoE; CMMP)
Cumulative monthly financing flows fell from £98bn in the 12 months to September 2022 to net repayments of £64bn in the twelve months to August 2023 (see chart above). This data includes volatile flows to non-intermediating financial companies. Excluding these, financing flows to corporates (PNFCs) and HHs fell from £64bn to £11bn over the period.
Trends in the average cost of new loans to UK PNFCs (%) since September 2018 (Source: BoE; CMMP)
In response to the 460bp increase in the average cost of borrowing from 2.03% in December 2021 (when the BoE rate increases began, see chart above) to 6.63% in August 2023, PNFCs have repaid loans in six of the past twelve months.
Despite three consecutive months of positive flows to PNFCs between July and September 2023, cumulative 12-month financing flows have been negative for the past nine months. In the 12 months to September 2023, PNFCs repaid £5.6bn in loans (see chart below).
Trends in financing flows (£bn) to UK PNFCs (monthly LHS, cum 12 months RHS) (Source: BoE; CMMP)
Note also that, behind the headlines, the average interest rate on new loans to SMEs has increased by 508bp from 2.51% in December 2021 to 7.59% in September 2023.
Trends in growth rates (% YoY) in corporate loans since September 2018 (Source: BoE; CMMP)
The annual YoY growth rate in lending to SMEs has been negative since August 2021 (see chart above). In short, SMEs face the dual challenge of lower lending volumes and higher borrowing costs (see the “How can UK SMEs invest in growth and job creation…” series).
Trends in the average cost of new loans to UK HHs (%) since September 2018 (Source: BoE; CMMP)
In response to a 343bp increase in the average cost of new secured HH lending (the largest segment of HH borrowing) and 246bp in the average cost of other HH lending (see chart above), HHs have repaid loans in three of the past six months. Cumulative financing flows have fallen from £60bn in September 2022 to £17bn in September 2023 (see chart below).
Trends in financing flows (£bn) to UK HHs (monthly LHS, cum 12 months RHS) (Source: BoE; CMMP)
Conclusion
The BoE and the ECB lack playbooks for such aggressive periods of monetary tightening. Financing flows to the UK and EA private sectors are falling sharply and reaching a potential “choke point” for growth and much-needed investment.
Central bankers may argue that this suggests that the transmission of monetary policy is working. Others might view such as rapid pace of adjustment as an indicator that the risks of policy errors and risks to future growth are rising very sharply…
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.
The impact of ECB policy seen through 12-month cumulative flows
The key chart
12-month cumulative financing flows (EUR bn) presented in stylised consolidated balance sheet format (Source: ECB; CMMP)
The key message
Monetary developments in the euro area (EA) highlight the elevated risks of ECB policy errors and their potential, negative impact on financing flows to the EA economy.
Headline YoY growth numbers for broad money and its key component (narrow money) and counterpart (private sector credit) highlight the speed at which EA money and credit cycles are rolling over.
Broad money (M3) fell -0.4% YoY, the first annual decline since May 2010. Narrow money (M1) fell -9.2% YoY, driven by a 10.5% YoY decline in overnight deposits. Growth in private sector credit slowed to 1.6% YoY, the slowest annual rate of growth since May 2016. The warning signs are there…
Within broad money, arbitrage continues in favour of the highest remunerated deposits – depositors are actively seeking higher returns – but this is insufficient to compensate for outflows from overnight deposits. The very slow/limited pass through from higher policy rates to the cost of overnight deposits has been one of the unique features of the current hiking cycle.
Financing flows to the private sector, largely in the form of loans, remain positive in absolute terms. They are slowing very sharply on a cumulative 12-month basis, however (see next post for details).
In short, cumulative financing flows to the EA economy were -€96bn in the 12-months to July 2023, compared with flows of €1,574bn, €1,014bn and €92bn in the 12-months to July 2020, July 2021 and July 2022 respectively.
The risks of significant policy errors are rising with negative implications for financing flows to the EA economy. How will the “data-dependent” ECB respond in September?
The impact of ECB policy on financing flows to the EA economy
Headline YoY growth numbers for broad money and its key component (narrow money) and counterpart (private sector credit) highlight the speed at which EA money and credit cycles are rolling over (see chart below).
Growth rates (% YoY) in M3, M1 and PS credit (Source: ECB; CMMP)
Broad money (M3) fell -0.4% YoY, the first annual decline since May 2010. The outstanding stock of money (€15,957bn) has fallen -1.6% from its September 2022 peak (€16,214bn). Narrow money, the key component of broad money, fell -9.2% YoY, driven by a 10.5% YoY decline in overnight deposits. Growth in private sector credit, the key counterpart to broad money, slowed to 1.6% YoY, its slowest annual rate of growth since May 2016.
Recall that monetary aggregates are derived from the consolidated balance sheet of MFIs. The key components are found on the liabilities side of the balance sheet – narrow money (M1) which comprises currency in circulation, other short-term deposits (M2-M1) and marketable instruments (M3-M2). Note that longer-term liabilities are not part of M3 as they are regarded more as portfolio instrument than as a means of carrying out transactions. The key chart above presents 12-month cumulative flows in the form of a stylised consolidated balance sheet.
Growth rates (% YoY) in M1 and M2-M1 (Source: ECB; CMMP)
Within broad money, arbitrage continues in favour of the highest remunerated deposits but this is insufficient to compensate for outflows from overnight deposits. The annual growth rate in other short-term deposits (M2-M1) was 24% YoY in June and July 2023, the highest rate of growth since the start of the EMU. In contrast, the -9.2% YoY decline in narrow money was the sharpest contraction since the start of EMU (see chart above).
Monthly flows (EUR bn) in EA monetary aggregates (Source: ECB; CMMP)
The EA banking system has seen eleven consecutive months of outflows in overnight deposits (see chart above). The outflow of narrow money totalled -€1,072bn (see key chart above), overshadowing the positive inflows of €852bn and €153bn into other short-term deposits (M2-M1) and marketable securities (M3-M2) and, outside broad money, the €262bn inflow into longer-term financial liabilities (mainly debt securities issued by banks).
Note that the very slow/limited pass through from higher policy rates to the cost of overnight deposits has been one of the unique features of the current hiking cycle.
Trend in 12-month cumulative monthly flows of loans to the private sector (Source: ECB; CMMP)
Financing flows to the private sector, largely in the form of loans, remain positive in absolute terms. They are slowing sharply on a cumulative 12-month basis, however (see chart above and next post for details).
12-month cumulative financing flows (EUR bn) presented in stylised consolidated balance sheet format (Source: ECB; CMMP)
In short, cumulative financing flows were -€96bn in the 12-months to July 2023, compared with flows of €1,576bn, €1,014bn and €92bn in the 12-months to July 2020, July 2021 and July 2022 respectively.
The risks of significant policy errors are rising. How will a data-dependent ECB respond in September?
Please note that the summary charts and comments above are abstracts from more detailed analysis that is available separately.
