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More recessionary monetary news

Simon Ward

Simon Ward

Economic Adviser

27 May 2022

Incoming monetary data continue to give an ominous message for near-term global economic prospects while suggesting major inflation relief in 2023-24.

Fed numbers released on Tuesday confirm that the US broad money aggregate tracked here* fell month-on-month in April, resulting in the three-month change turning marginally negative. Weekly data on currency in circulation, commercial bank deposits and money funds suggest another decline in May.

Monthly growth in Eurozone broad money**, meanwhile, was today reported to have fallen to 0.1% in April, pulling three-month expansion down to 3.7% annualised – see chart 1.

Three-month growth rates of narrow and broad money are now below pre-pandemic averages (i.e. over 2015-19). The ECB should wait to see if money growth rebounds before hiking rates but appears to be set on hawkish autopilot, with potentially disastrous consequences.

Three-month growth of loans to households and non-financial corporations remains solid but is below its peak and expected here to slow further as demand for inventory financing falls off and higher mortgage rates curb housing credit.

The slower expansion of broad money than lending mainly reflects a fall in banks’ net external assets – the counterpart of a basic balance of payments deficit – and an increase in their capital reserves. The Ukraine conflict is likely to have boosted capital outflows while causing banks to become more risk-averse. ECB purchases of government securities remained substantial in the three months to April, at the equivalent of 0.7% of broad money, or 2.7% at an annualised rate. Further monetary weakness is likely as this support ends.

The slump in US and Eurozone nominal money growth implies a severe squeeze on real money balances, given current high inflation – consumer prices rose by 9.9% and 10.9% annualised respectively in the three months to April.

The current six-month rate of contraction of Eurozone real narrow money was exceeded only in 1973-74 and the early 1980s. Smaller declines in 1991, 2007 and 2011 also foreshadowed recessions – chart 2. There is stiff competition for the prize of worst recent official forecast but the March ECB staff projection that Eurozone GDP would grow by 4% annualised in Q2 / Q3 is a strong contender.

*”M2+” = M2 + large time deposits at commercial banks + institutional money funds
**Non-financial M3

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