Eurozone money and credit trends continue to give a positive signal for economic prospects. GDP and domestic demand rose by 1.6% and 2.2% respectively in the year to the fourth quarter of 2015 and may grow at similar rates during 2016 (i.e. well above “potential” economic expansion estimated by the EU Commission, IMF and OECD at 1.0-1.2% in 2016).

The “best” monetary measure for economic forecasting, according to ECB research, is real (i.e. inflation-adjusted*) non-financial M1, comprising currency holdings and overnight deposits of households and non-financial corporations. This contracted before the 2008 and 2011 recessions, rebounding strongly before the 2009 and 2013 recoveries. Six-month growth of this measure rose to 5.0% in February, or 10.3% annualised. Growth has been rangebound at a high level since early 2015, consistent with stable, solid economic expansion – see first chart.


There is no country breakdown of non-financial M1 but the ECB publishes country data on total overnight deposits (i.e. including those of financial corporations). The six-month change in real overnight deposits is strong in Spain and France, and solid in Italy and Germany – second chart. In other countries (not shown), it is particularly strong in Portugal and weak only in the Netherlands, reflecting a fall in cash pooling deposits, which may have little economic significance.


Broad money M3 rose by an annual 5.0% in nominal terms in February, unchanged from January. This is above the ECB’s 4.5% “reference value” deemed to be consistent with its inflation target and strong in real terms relative to a 12-month change in consumer prices of -0.2% in February.

Annual M3 growth, however, is below a peak of 5.4% in April 2015, just after the ECB launched QE. This mirrors experience in the US, UK and Japan, where QE also seemed to have little broad money impact. As discussed in previous posts, QE was ineffectual in monetary terms because it was associated with 1) increased selling or reduced buying of government securities by commercial banks and / or 2) a deterioration in the basic balance of payments position and a consequent fall in the banking system’s net external assets.

The latter has been the dominant factor in the Eurozone to date. As the third chart shows, an increased contribution to annual M3 growth of banking system lending to general government since QE was launched has been matched by the contribution of banks’ net external assets shifting from positive to negative.


*Consumer prices used for adjustment here.