Press reports of faster deposit outflows from Greek banks accord with developments on the ECB’s balance sheet last week.

“Other claims on euro area credit institutions denominated in euro” – a category that includes the Greek and Irish emergency liquidity assistance (ELA) operations – rose by €3.7 billion in the week to Friday. This may reflect Greek banks borrowing more to plug a funding gap created by deposit flight.

Greek banks are unable to increase borrowing under the ECB’s regular programmes (i.e. refinancing operations and the marginal lending facility) because of a lack of higher-quality collateral. Regular lending, however, rose by €7.0 billion last week, possibly indicating capital flight from other peripheral banking systems not currently constrained by a collateral shortage.

The €3.7 billion rise in “other claims” last week compares with a fall of €11.7 billion in Greek deposits during the first quarter. Domestic private sector deposits stood at €170 billion at the end of March, of which €66 billion was in overnight deposits. It is reasonable to expect this instantly-accessible cash to leave the Greek banking system amid current political and economic chaos, implying a heightened risk of deposits being frozen and/or redenominated in the event of EMU expulsion.

Faster capital flight could push Greece out of the euro well before next month’s elections, rendering current political manoeuvring irrelevant. The mechanism would be Greek banks losing access to additional ELA either because they run out of lower-quality collateral or because the Bundesbank and other “core” central banks place a cap on their Target2 exposure – why, after all, should German tax-payers underwrite high-risk lending serving the function of allowing austerity-resistant Greeks to transform deposits in bust domestic banks into Bunds and other “safe” assets?

Officialdom and the consensus cheered sterling’s 2007-08 collapse on the grounds that it would speed economic recovery. Posts at the time suggested that capacity and credit constraints would prevent a major expansion of tradeables output, implying a bigger boost to inflation and consequent squeeze on real incomes and spending – see, for example, here. The net impact on the economy, therefore, would be negative, at least in the short to medium run.

Three years on, there is little reason to revise this assessment. The trade volume response to the lower exchange rate has been muted – net exports strengthened by 0.9% of GDP between the fourth quarters of 2008 and 2011. Non-oil import prices, meanwhile, surged by 8.8% over the same period, implying a 2.6% direct boost to the domestic price level (based on a 29% share of non-oil imports in domestic demand).

Weak wage trends suggest that workers have been unable to obtain compensation for increased prices. The import cost boost, in other words, may have cut real employment incomes by 2.6%. An equivalent impact on consumer spending would imply a GDP drag of 1.6% (based on a 62% share of consumption in GDP), comfortably exceeding the positive contribution from net exports. (This ignores any effect on corporate spending.)

Trade improvement has stalled since early 2011, partly reflecting Eurozone economic weakness. Goods export volumes rose by only 0.3% in the year to the first quarter of 2012, with a fall of 3.3% in deliveries to other EU countries offsetting 4.4% growth to the rest of the world.

Supply-side weaknesses may constrain trade performance even if foreign demand strengthens. The percentage of CBI manufacturers operating below capacity is close to the historical average, while skilled labour shortages have surged. The percentage citing credit or finance as a constraint on exports remains elevated.

The UK’s experience casts doubt on the view expressed in a Financial Times comment piece today that “Greek growth would probably surge” in response to a mega-devaluation following EMU exit. Rather than an unlikely export boom, the case for leaving rests on Greece gaining the ability to calibrate monetary conditions to the needs of the domestic economy. Monetary autonomy, however, might be severely restricted amid the financial chaos likely to accompany departure.

Speculators in US Treasury futures have a poor timing record and last week went long, suggesting a rebound in yields.

The chart aggregates the positions of “non-commercial” investors in four Treasury futures contracts using duration-based weights. Examples of recent poor timing include: 1) a large long position in October 2010 – yields subsequently surged; 2) a large short position in early 2011 – yields subsequently collapsed; and 3) another large short position in March this year ahead of the recent yield decline.

The poor record reflects trend-following behaviour – more precisely, a tendency to invest in trends when they are at a late stage. Speculators are occasionally “bailed out” by events that cause an established trend to extend – a long position adopted in the second half of 2007, for example, benefited from the unfolding financial crisis. Such events, however, need to surprise – current Eurozone woes, presumably, are well-discounted.

Another possible contrarian signal is the swelling consensus that the US bond market is “turning Japanese”, i.e. low nominal yields reflect deflationary excess private saving. Current negative real yields, however, have no parallel in recent Japanese experience and are more plausibly the product of “financial repression” – Federal Reserve imposition of zero interest rates and effective deficit monetisation.

Previous posts argued that China was easing monetary policy too slowly, risking an economic “hard landing”. This danger is still present judging from weak April money supply figures.

Slowing inflation and initial easing moves resulted in a pick-up in six-month growth in real M2 late last year but this has reversed more recently, with April’s reading the lowest since October – see first chart. Real M1 is much weaker, contracting over the last six months – similar slippage in 2008 preceded a fall in industrial output.

The three-month repo rate has declined recently, probably reflecting a combination of more generous central bank liquidity supply and market expectations of policy easing – second chart. Time is running out.

OECD leading indices for March released today confirm an incipient slowdown in global growth but monetary trends suggest limited weakness while hinting at a momentum trough in the late summer.

As previously discussed, the approach to forecasting the global cycle employed here relies on two key inputs – six-month growth in global real narrow money and a leading indicator derived from the OECD’s country leading indices. Real money typically leads industrial output by about six months with the leading indicator moving about three months later (i.e. three months ahead of output).

Real money growth peaked in November 2011 and fell sharply through February 2012, suggesting a slowdown in output momentum from a May top, allowing for the usual six-month lead. This prospect has now been confirmed by a February peak in the leading indicator, with the March decline the first since June 2011 – see chart. (Note that the indicator is based on a proprietary transformation of the raw data so cannot be inferred directly from the OECD release.)

Turning points in the leading indicator usually signal the start of a multi-month trend. Six-month real money expansion, however, recovered marginally in March, hinting that February may have marked a trough. If so, output momentum may bottom in August, with the leading indicator reaching a low in May (applying the respective six- and three-month leads).

The risk, of course, is that real money resumes a slowdown after temporarily stabilising in March / April. Recent policy easing in Europe, Japan and some emerging economies should be supportive but could be offset by an “endogenous” tightening of financial conditions if the Eurocrisis escalates. With real money currently still expanding respectably by historical standards, however, the provisional message is that the coming economic slowdown will be modest and possibly short-lived.

The monetarist forecast of a slowdown in the US economy from the spring is supported by recent data but the odds favour a downshift in growth rather than anything worse. Real narrow money is still comfortably higher than six months ago, consistent with an ongoing recovery.


10 out of 11 post-war recessions were preceded by a fall in real narrow money. The exception – the 1953-54 recession – was apparently caused by severe fiscal tightening as defence spending was slashed after the Korean war. A repeat is possible if Congress fails to address the end-2012 “fiscal cliff” – i.e. automatic tax increases and spending cuts – implied by current policies.

The rise in non-farm payrolls slowed to 115,000 in April versus an expected 170,000 (although the gain in the previous two months was revised up by 53,000). Private payrolls, however, were still up by a solid 0.5% from three months before, while aggregate hours worked rose 0.6%.


Suggestions that the labour market is about to go into reverse are not supported by the Conference Board’s employment trends index (ETI), which rose further in April. The ETI is a composite of eight leading indicators: consumers finding “jobs hard to get”, initial unemployment claims, small firms with “hard to fill” positions, temporary-help employees, part-time workers, job openings, industrial production and real business sales.


March job openings – not incorporated in the latest ETI – were similarly encouraging, suggesting a continued uptrend in private payrolls.


Firms have revised up 2012 capital spending plans, according to the Institute for Supply Management semi-annual business survey, with increases of 6.2% and 3.6% now expected in manufacturing and non-manufacturing respectively versus 1.9% and 0.2% in December. Operating rates rose in both sectors, with a weighted average reaching its highest level since spring 2008. The implication that there is limited spare capacity in the economy accords with recent core inflation resilience and casts doubt on estimates by the OECD and others of a large negative “output gap”.