Eurozone monetary trends are judged here to be consistent with a continued economic recovery during the first half of 2014. December numbers, however, were mildly disappointing – further weakness in January would suggest slower growth later in 2014.
 
The headline money / credit measures continue to diverge, allowing entrenched bears and bulls to cite “evidence” in favour of their respective positions. In real terms (i.e. adjusted for consumer prices), broad money M3 was unchanged in the six months to December, while lending to the private sector was down by 1.6% (not annualised). Narrow money M1*, however, rose by a respectable 2.4%.

The statistical evidence is that real M1 significantly outperforms M3 as a leading indicator, while credit lags the cycle. Real M1, indeed, has a flawless forecasting record over the last decade, clearly signalling well in advance the 2008 recession, 2009-10 rebound, 2011-12 “EMU crisis” relapse and current recovery. M3 missed the former two while lending has had little relationship (even lagging) with short-term economic fluctuations – see first chart.

ECB research confirms that the signal from M1 can be improved slightly by stripping out financial sector holdings, which are volatile and of little consequence for short-run economic prospects. Real non-financial M1 rose by 3.2% in the six months to December versus 2.4% for headline M1. Its growth has been broadly stable since spring 2013 at a level historically consistent with moderate economic expansion – second chart.

While the six-month increase remains healthy, real non-financial M1 fell in December alone. This could be an early signal of a second-half economic slowdown, although monthly numbers are often volatile around year-end.

Further insight is provided by country-level narrow money trends**. Real growth in the core and peripheral groupings*** was similar in the six months to December, suggesting no major divergence in economic prospects – third chart. Among the large economies, narrow money trends are solid in Germany and Spain, with France and Italy lagging and renewed Dutch weakness hinting that recent economic improvement in that country will prove temporary – fourth chart.

*M1 comprises notes / coin and overnight deposits.
**Country data are available for overnight deposits but not notes / coin.
***Core = Austria, Belgium, France, Germany, Luxembourg, Netherlands; periphery = Greece, Ireland, Italy, Portugal, Spain.