Eurozone monetary trends continue to suggest a big economic slowdown over the balance of 2011, with weakness recently extending from the periphery to the core. This has mixed implications for the Eurozone debt crisis: lower growth is likely to undermine fiscal plans but a core slowdown may head off further ECB tightening and allow the euro to depreciate, relieving pressure on the periphery.

M3 was flat in April while M1 fell by 0.3%. Real M1 is the best leading indicator of the economy and has contracted by 1.7% (not annualised) over the last six months, similar to the decline preceding the 2008-09 recession – see first chart.

Recent significant outperformance of core economies reflects stronger monetary trends last summer and autumn. Real M1 deposits, however, have fallen in the core as well as the periphery over the last six months – second chart. Negative economic surprises, therefore, may be evenly distributed between the two groups over coming months.

While Spain remains the focus of market concern about contagion, monetary trends suggest a bleaker economic outlook in Italy. Spanish real M1 deposits, surprisingly, rose over the last six months compared with modest contractions in France and Germany and a large fall in Italy – third chart. Elsewhere, there were big declines in Greece (unsurprisingly), Belgium and Austria while Ireland's contraction slowed, matching the Eurozone average.

The EU Commission UK consumer confidence index recovered strongly in May, supporting the suggestion of an improving consumer outlook in a post a month ago and a follow-up earlier this week. The index, which summarises consumer views on the economy, their own financial prospects, saving and unemployment, rose to its highest level since August, though remains below its long-run average (-14 versus -10).

Particularly notable was a large fall in the percentage of respondents expressing concern about the labour market, suggesting that the economy is continuing to create jobs and casting doubt on forecasts of a renewed rise in the official unemployment rate – see chart. Hiring expectations in the companion EU Commission business surveys are also consistent with rising employment.

As well as an improving labour market, consumer spirits may have been lifted by:

• rising pay settlements – up by one percentage point in the first quarter from a year before, according to Incomes Data Services;

• increased hopes that inflation is close to a peak – the percentage of consumers expecting faster price rises over the next year fell to its lowest since September;

• improving fiscal trends (notwithstanding April's larger-than-expected deficit), implying a reduced risk of further large tax increases; and

• banks' decision to cave in on payment protection insurance claims – redress awarded by the Financial Ombudsman Service to date has averaged £2,750 per claim while Which? estimates an aggregate pay-out of £7.9 billion.

GDP and services output data released today confirm that the economy has bounced back strongly from winter weakness while the current inflation overshoot reflects domestic income pressure as well as VAT and external factors – contrary to the MPC's assertions.

GDP growth of 0.5% in the first quarter conceals an estimated rise of 2.2% between January and March as bad weather effects unwound. March output was 1.2% above the first-quarter average and "only" 2.9% below the peak quarterly level of GDP in the first quarter of 2008 – see first chart. (The monthly GDP estimate is calculated from ONS data on industry and services and a Eurostat series for construction output.)

The March GDP reading was boosted by a surge in construction output that is unlikely to be sustained. The additional bank holiday in April, meanwhile, will depress GDP in that month and for the second quarter, with an unwind in the third quarter. Even so, the MPC's apparent assumption of GDP growth of only 0.3% in the second quarter seems low in light of the March estimate.

The expenditure breakdown of GDP – unreliable at this stage of the estimation process – implies that net exports accounted for all of the growth in the first quarter and most over the last year. Household consumption fell by 0.6% last quarter but this reflected an inflation squeeze rather than a reluctance to open wallets – the nominal value of spending surged by 2.1%, to stand 5.2% higher than a year before.

The domestic contribution to inflation is measured by the "implied deflator for gross value added at basic prices" – this excludes indirect taxes and import prices and is essentially the sum of wages, profits and rents per unit of output. The GVA deflator rose by 2.4% in the year to the first quarter – at odds with the MPC's claim that the inflation overshoot reflects "exogenous" factors. Slow growth in pay costs has been offset by a surge in non-wage income – second chart.

While CPI inflation of 4.5% in April remains below the peak of 5.2% reached in September 2008, the national accounts measure of consumer inflation is well above its equivalent high. The consumer spending deflator rose by 5.6% in the year to the first quarter, the largest annual increase since 1992 – third chart.

The MPC's Paul Fisher is reportedly "nervous and worried" about UK consumer prospects. Given the Committee's forecasting record, it will be no surprise if consumer indicators rebound over coming months.

Consumer spending weakness, of course, has been mostly due to surging prices, for which the MPC bears significant responsibility. The first chart compares three-month growth of retail sales value and volume. Value expansion has remained solid over the winter and spring, with a volume decline explained by the inflation spike.

Slumping consumer confidence and downward pressure on real household disposable income may be yesterday's story. Real income should recover in 2012, reflecting recent higher pay settlements, a mechanical drop in inflation, further employment gains and a reduced drag from fiscal tightening.

Consistent with confidence bottoming, households were less pessimistic about their finances in May, according to the monthly Markit survey – current and future indices were at their best levels since January. Retailing shares, meanwhile, have outperformed the market by a further 7% over the last month. The recent fall in oil prices, if sustained, promises some relief to strained budgets – second chart – while Which? estimates that payment protection insurance compensation will transfer £7.9 billion from banks to consumers, equivalent to 0.8% of annual disposable income.

US monetary trends suggest that the economy will perform solidly over the remainder of 2011, limiting the extent of the current global slowdown focused on Asia / emerging markets and Euroland.

The first chart shows six-month changes in US industrial output and real narrow money, defined here as currency plus demand deposits. Despite recent faster inflation, six-month real money growth remains strong at more than 5% in April, or 11% annualised.

The forecasting approach here has emphasised narrow money since the financial crisis on the grounds that the demand to hold broad money has been depressed by super-low interest rates. Broader aggregates, however, are also looking better. A wide liquidity measure comprising currency, bank and thrift deposits, money market funds and commercial paper has surged over the last three months – second chart.

Monetary strength, of course, partly reflects QE2 but any slowdown after securities purchases end in June will affect the economy only from early 2012. Improving credit trends, moreover, should limit monetary weakness: recent solid expansion of commercial and industrial loan books could presage a pick-up in overall bank lending – third chart.