Euroland money measures grew strongly in July, more than compensating for softer June data and suggesting improving economic prospects.
Previous posts argued that economic momentum would bottom around Q3 and recover into 2020, based on a strong rise in six-month real narrow money growth between November 2018 and March 2019. The monetary pick-up stalled in Q2 but is now back on track, while the manufacturing PMI appears to be stabilising on schedule – see first chart.
Six-month growth of nominal narrow money rose to a 25-month high in July – second chart. The Q2 pull-back in real money expansion reflected a rise in six-month consumer price inflation but this is probably peaking.
Narrow money acceleration is being driven by plunging bond yields, which have moved to discount a major ECB easing package next month. Euroland monetary and economic trends are sensitive to changes in longer-term yields – third chart.
A country breakdown is available for the deposit component of narrow money. Growth is solid across the big four but has cooled recently in Spain while strengthening in Italy – fourth chart.
While monetary trends are hopeful, the economic outlook remains at risk from hostile external policies – a no-deal Brexit and / or US imposition of auto tariffs.
Industrial output has fallen by more in Germany than other Euroland economies, partly reflecting greater sensitivity to Chinese / global trends, but a bounce-back could be imminent. Recent woes were signalled by the six-month change in real M1 deposits of non-financial corporations turning negative in late 2018 but the latter weakness has now reversed – fifth chart.
The August Ifo manufacturing survey, meanwhile, contained glimmers of hope, with the orders inflow balance improving and the finished goods stocks balance consistent with a bottom in the inventory cycle – sixth chart.