A slowdown in Euroland narrow money in late 2017 / early 2018 suggested that the economy would lose momentum over the course of last year. Coincident economic indicators such as the purchasing managers’ surveys were riding high in early 2018 and the ECB and consensus ignored the monetary warning signal.
Could the reverse scenario be about to play out? The manufacturing PMI fell to a six-year low in March, the ECB has slashed its forecasts and commentators are warning of heightened recession risk. Previous posts, however, noted that money trends had improved since late 2018 and March data released today provide further evidence of a pick-up, as discussed below.
One difference from late 2017 / early 2018 is that Euroland monetary developments have “decoupled” from trends in the US and China. Then, Euroland weakness was part of a synchronised global monetary slowdown, suggesting that economic growth would be held back by net exports as well as domestic demand. Now, global money trends have yet to echo the Euroland pick-up, implying that the trade drag may persist.
There are, moreover, downside economic risks from US trade policy and Brexit. These risks are probably dampening business “animal spirits”, in turn implying that any economic pick-up could be muted and / or delayed.
Stronger monetary trends, nevertheless, are judged here to warrant shifting to a positive view of Euroland economic prospects relative to a gloomy consensus. Recession fears, in particular, appear groundless – barring trade / Brexit shocks.
Annual growth of narrow money, as measured by non-financial M1, stabilised around year-end and rose to 7.9% in March, a 14-month high, suggesting that annual n
ominal GDP expansion will recover later in 2019 – see first chart.
Growth of the broad non-financial M3 measure also increased further, to 5.1%. The headline M1 / M3 money measures are lagging the non-financial aggregates tracked here but have also shown a clear acceleration recently – second chart.
Six-month growth of real non-financial M1 (i.e. deflated by consumer prices) continued its recovery from a low reached in July 2018 and is high by current global standards – third chart*.
Overnight deposits within non-financial M1 break down into household and corporate components; both are expanding solidly – fourth chart.
Deposit growth remains strongest in France and Spain but there was a notable pick-up in Germany last month, while Italy continues to lag – fifth chart.