Eurozone monetary trends continue to suggest that the economy will perform significantly better in 2013 than 2012. The six-month growth rate of Eurozone-wide real M1 deposits rose to 2.9% (not annualised) in February – the fastest since May 2010 and historically inconsistent with recession.

Importantly, real M1 deposits are now growing in the periphery, suggesting economic stabilisation or better in the second half of 2013 – see first chart. The pick-up has been led by Italy but weakness elsewhere has abated – second chart.

The key monetary concern now is ongoing real M1 deposit contraction in France, although this eased in February (and recent weakness may partly reflect transfers out of such deposits due to a raising of the investment limit on tax-free Livret A savings accounts). Elsewhere in the core, Dutch growth has slowed sharply – third chart.

These indications are, of course, subject to the substantial qualification that the unexpectedly large losses imposed on uninsured depositors in the two largest Cypriot banks could trigger renewed deposit outflows from the periphery, although some funds may be transferred from weaker to stronger institutions within the same country.

Gloomsters claim that the double dip occurred in the fourth quarter of 2011 and first quarter of 2012. Last month, the Office for National Statistics (ONS) estimated that GDP declined by 0.3% and 0.1% respectively in the two quarters*. Excluding North Sea oil and gas production, however, the changes were -0.2% and zero respectively. This implied no double dip in the onshore economy, in the conventionally-understood sense of consecutive quarterly contractions – see previous post.

The figures have now been revised again to show a GDP fall of only 0.1% in the fourth quarter of 2011 versus 0.3% previously. The decline excluding the North Sea is now 0.1% rather than 0.2%.

The total fall in GDP during the two quarters of the claimed double dip, therefore, is now just 0.2% compared with an original estimate of 0.5% in April 2012.

Revisions, of course, will continue for many years and are likely, on balance, to be upwards as the statisticians gain better understanding of the industries and firms that are leading the upswing – this has been the pattern in prior economic recoveries.

The double dip, in other words, is probably a myth that the ONS will consign to the dustbin of history at some future point when no one is any longer interested in whether one occurred.

Today’s update contained no change to the earlier-reported 0.3% GDP decline in the fourth quarter of 2012, which is entirely attributable to the unwind of the Olympics boost. The level of GDP last quarter, however, was revised up by 0.1%, reflecting stronger performance in earlier quarters.

*GDP also fell in the second quarter but even gloomsters admit that this was due to the additional Diamond Jubilee bank holiday so should be ignored.

A recent post questioned why Japanese bank reserves had fallen in early 2013 despite continued significant Bank of Japan (BoJ) asset purchases. It concluded that reserves weakness reflected a seasonal rise in the government’s balance at the BoJ and was likely to reverse in late March / April as this balance was run down.

Japanese reserves have, indeed, risen sharply in recent days, reaching a new yen record this morning – see first chart. Current asset purchase plans suggest a further rise of 63% by end-2013 but the BoJ is under strong pressure to expand these plans at its meeting next week – the first under its new leadership.

The Fed, meanwhile, last week gave no hint of any slowdown in its $85 billion per month pace of securities buying, which should continue at least through mid-year.

G3 bank reserves are currently still well down from end-2012, reflecting a Eurozone fall due to banks repaying borrowings in the two three-year longer-term refinancing operations conducted in December 2011 and February 2012 – second chart. Eurozone reserves, however, should stabilise or recover as the heavy losses imposed on uninsured depositors in the two largest Cypriot banks encourage precautionary outflows from weaker institutions in other countries, increasing their need for ECB funding.

The G3 reserves total, therefore, is likely to sustain its recent pick-up, reaching a new record later in the spring.

Cyprus will lose access to ECB liquidity support, implying de facto exit from monetary union, if the country fails to agree a revised deal with the EU / IMF. Some commentators, however, have suggested that a liquidity crunch will occur even if the Cypriot government bites the bullet, on the grounds that the deposit base of the banks will vanish as soon as their doors reopen, and the ECB will be unable or unwilling to plug the gap. This latter scenario is unlikely.

Deposits of euro area residents, excluding banks and the central government, with the Cypriot banking system stood at €47.4 billion at end-January, according to the ECB. Of this, €10.4 billion was available for immediate withdrawal, with the remainder in term and notice accounts. Cypriot banks also had deposit liabilities of €21.4 billion to non-Eurozone non-banks at the end of the fourth quarter (the latest available datapoint). If the ratio of instant-access to total deposits is the same as for the Eurozone portion, the implied amount available for immediate withdrawal is €4.7 billion. This suggests potential deposit flight of about €15 billion next week*.

This is an upper limit because 1) some deposits will be frozen if bank restructuring proposals under discussion are adopted, 2) some withdrawals are likely be redeposited at “safer” banks operating in Cyprus, 3) some depositors will not have a foreign account into which to transfer funds (and may be unable to open one) and 4) some may be reluctant to withdraw the full amount in cash (if this is permitted).

The total assets of the Cypriot banking system stood at €126.4 billion at end-January, according to the ECB. Allowing for a much lower true value, there should still be more than sufficient collateral to allow the ECB to advance funds to cover the likely outflow, taking into account the looser requirements for “emergency liquidity assistance” compared with normal monetary policy operations.

The risk with any deal is not that it will be undermined by a bank run but rather that – like the original agreement – it will collapse within days amid further political and social unrest.

*Cypriot banks also had interbank liabilities of €24.6 billion to other Eurozone institutions and €13.6 billion to non-Eurozone banks on the latest figures but part of this will again be on a term basis, while banks are less likely to withdraw funding if a deal is agreed.

The Chancellor could have chosen to be bold in this Budget, despite the weak state of the public finances. He could, for example, have announced a major review of the tax system aimed at reducing reliefs and loopholes in order to lower and smooth marginal rates. On spending, he could have relaxed the ring-fencing of health, education and foreign aid to lessen damaging cuts in other departments and release funds for investment.

Instead, this is another Tinkerman’s Budget, containing a host of measures designed to capture headlines but amounting to little more than robbing Peter to pay Paul, and having little or no implication for medium-term economic prospects.

Peter and Paul, indeed, are often the same person. The higher personal allowance and lower fuel and beer duty, for example, are effectively funded by the early introduction of the single state pension, which will result in a large increase in national insurance contributions of currently contracted-out employees from 2016-17. Similarly, the reduction in corporation tax to 20% from 2015-16 and the £2,000 allowance aimed at micro-employers will be offset by increased employer NI contributions stemming from the pension change, along with a tightening of the tax treatment of partnerships and corporate losses, supposedly to tackle “avoidance”.

The most significant announcement was an extension of support for the housing market via an expansion of equity loans and the introduction of a mortgage guarantee scheme of up to £12 billion, estimated to be sufficient to support lending of £130 billion. The latter scheme, however, will be self-financing – banks must purchase guarantees from the government and will pass the cost on to borrowers. Mortgage access, in other words, will improve but at the expense of affordability.

The tinkering approach was also in evidence in the revised MPC remit, which retains the primacy of the 2% inflation target but directs the Committee to explore “explicit forward guidance” and Fed-style “intermediate thresholds” for key indicators like the unemployment rate, in line with the thinking of incoming Bank of England Governor Mark Carney. The Chancellor eschewed the opportunity of opening up a wider debate on the monetary policy framework and the remit change seems mainly designed to pressure other MPC members to fall in behind Mr Carney should he choose to pursue such initiatives.

The MPC vote was an unchanged 6-3 in March, in line with the forecast of the MPC-ometer model followed here – see previous post. The Committee's “reaction function” may be in the process of shifting but its current behaviour remains consistent with its historical response to economic and financial news.

With half of the inputs for the April forecast available, the model suggests that the current split will persist – the final reading will depend importantly on March consumer and purchasing managers’ surveys*, as well as developments in the Cyprus crisis, to the extent that these affect UK financial markets.

A shift in the vote is more likely to occur in May – policy changes have historically been bunched in Inflation Report months while the preliminary first-quarter GDP estimate released on 25 April should carry strong weight. The view here remains that the economy is expanding in early 2013, a contention supported by encouraging January services turnover data – see yesterday’s post. (This number, of course, has been universally ignored by media gloomsters, in contrast to blanket coverage of the January fall in industrial output reported last week, despite the latter’s smaller significance for the GDP result.)

*Released on 27 March and in the first week of April respectively.