Eurozone monetary trends remain positive but are no longer strengthening, suggesting stable GDP growth at around its recent pace of 0.4% per quarter, i.e. 1.5-1.75% annualised. This is above most estimates of potential, implying a continued decline in unemployment. Economic prospects may be improving in Spain / Italy relative to France / Germany, based on country narrow money data.

Annual growth of Eurozone-wide M3 was 5.0% in September and has moved sideways since early 2015. Annual M1 growth, however, has fallen from a peak of 11.8% in July 2015 to 8.5% in September. The combination of stable M3 expansion with slowing M1 has led some commentators to suggest that economic growth prospects have deteriorated at the margin.

The M3 and M1 numbers, however, have been pulled down by a sharp slowdown and recent small contraction in financial institutions’ deposits, possibly reflecting further reductions in interest rates – such deposits contain little information about near-term economic prospects. Annual growth of non-financial M1 – comprising holdings of households and non-financial corporations (NFCs) – was stronger than that of M1 in September, at 9.1%, and has slowed by less. Non-financial M3 growth, meanwhile, rose to 5.6% last month, its fastest since 2008 – see first chart.


Economic growth prospects depend on real rather than nominal monetary trends. Six-month growth rates of non-financial M1 and M3, deflated by consumer prices, have moderated recently but remain solid by recent and longer-term standards – second chart. The slowdown would need to extend significantly further to suggest weakening prospects, on the judgement here.


The decline in real narrow money growth has been focused on France and, to a lesser extent, Germany, with Spanish and Italian trends remaining upbeat, based on country data on overnight deposits – third chart. This may signal improving relative economic and equity market prospects for Spain / Italy, and deteriorating reelection prospects for President Hollande.