Previous posts speculated that rising ECB lending to banks during June reflected Spanish and Greek institutions borrowing to offset large-scale deposit outflows. Just-released Banco de España (BdE) balance sheet figures show that Spanish banks, in fact, accounted for the bulk of the increase.

Total Eurosystem lending to banks rose by €81.1 billion or 5.9% between 1 June and the end of the month*. BdE, meanwhile, increased lending by €62.3 billion between 31 May and 30 June. Assuming that system-wide loans were unchanged between 31 May and 1 June, therefore, Spanish banks accounted for 77% of the total lending rise last month. The size of the Spanish increase suggests that funding was used to finance the government as well as cover deposit outflows.

BdE lending to banks has now risen by €288.7 billion since end-November 2011 (i.e. before the ECB’s three-year LTROs), equivalent to 27% of Spanish annual GDP. BdE’s TARGET2 liabilities to the rest of the Eurosystem have risen by €271.2 billion over the same period, standing at €408.4 billion on 30 June, equal to 38% of GDP.

Banca d’Italia balance sheet figures also released this week show a much smaller €8.5 billion increase in lending to banks in June, while TARGET2 liabilities were little changed, closing the month at €274.3 billion.

The Spanish and Italian figures imply that lending to banks by other Eurosystem members rose by only about €10 billion in June. This is a net result so could conceal higher borrowing by Greek banks; the suggestion, however, is that Greek deposit outflows were smaller than feared last month.

*This comprises “lending related to monetary policy operations” and “other claims”, under which the Greek and Irish “emergency liquidity assistance” (ELA) operations are recorded.

Global six-month real narrow money growth – the key longer-range forecasting indicator employed here – stood at 1.5% (not annualised) in May, little changed from April’s 1.6%. This is the weakest reading since September 2008 but is consistent with slow global economic expansion rather than a recession – see first chart.

Global real money growth may be bottoming, with a further decline in inflation likely to provide near-term support and central bank easing improving prospects for nominal monetary expansion. Allowing for the normal half-year lead, the April / May stabilisation, if confirmed, suggests that global industrial output momentum will trough in October / November. Economic news, in other words, is likely to remain weak over the summer.

The minimal change in the global real money measure between April and May conceals potentially significant country developments. US real narrow money expansion, while still relatively firm, fell in May and will probably do so again in June, based on weekly nominal data – see second chart, which includes a June estimate for the US. Real money also slowed further in Japan and remains weak in China but the Eurozone six-month change is no longer negative while the UK reading moved up to its highest level since January 2010. The suggestion is that Eurozone and particularly UK news will surprise positively in late summer / autumn, at least relative to current downbeat expectations.

A cautious investment stance is warranted until the global real money measure turns up. With the Federal Reserve yet to launch “QE3”, this is likely to depend on the recent European recovery being sustained along with a reversal of narrow money weakness in China – plausible in light of recent policy easing moves but far from guaranteed.

At least up to the first quarter of 2012, UK real public spending was falling in line with government plans.

Revised national accounts figures released last week show a rise of 3.0% in general government real consumption of goods and services (including the services of government employees) in the year to the first quarter, to a new record. This suggests that efforts to restrain spending are failing.

The national accounts consumption numbers, however, are misleading for two reasons. First, they use a government-specific price index for the conversion into real terms, whereas the Office for Budget Responsibility’s real spending numbers are based on the economy-wide GDP deflator. The government consumption deflator is rising more slowly than the GDP deflator at present, reflecting a squeeze on public sector pay. If the GDP measure is used instead, real consumption of goods and services in the first quarter was 0.8% below a peak reached in the third quarter of 2009 – see first chart.

Secondly, and more importantly, consumption of goods and services accounts for only 49% of “total managed expenditure” (TME) – other current payments (i.e. on transfers and interest) make up 46% and gross investment the remaining 5% (2011 figures). The government has focused cuts on these components – they were 8.3% and 12.3% respectively below peak in real terms (using the GDP deflator for the conversion) in the first quarter. Real TME, therefore, was 4.0% beneath its all-time high reached in the fourth quarter of 2009 – second chart*.

The first-quarter level of real TME was 0.7% below the 2011-12 average, suggesting that it is on track to meet the OBR’s March forecast of a 0.5% decline in 2012-13 – assuming spending control is maintained.

*All figures are seasonally adjusted; consumption of goods and services and gross investment are released in this form while TME was adjusted in Datastream, with other current spending derived as a residual.

The national accounts rental yield – actual plus imputed owner-occupier rents expressed as a percentage of the value of the housing stock – stood at an estimated* 3.94% at the end of the first quarter of 2012, up from a revised 3.89% in the fourth quarter of 2011. This compares with a long-run average of 3.61%, suggesting that house prices are undervalued by about 8% relative to rents – see chart.

The rise in the yield from 3.66% a year earlier (i.e. in the first quarter of 2011) mainly reflects a 7.5% increase in rents in the latest four quarters from the previous year.

The merits of the rental yield as a valuation metric were discussed in a previous post.

*The value of the housing stock is estimated for 2011 and beyond by linking the last published number – for end-2010 – to the ONS (previously DCLG) house price index.

UK monetary trends are improving, casting doubt on the wisdom of a likely further expansion of QE at this week’s MPC meeting.

The first chart below shows six-month changes (not annualised) in a range of real broad and narrow money supply measures (i.e. deflated by consumer prices, seasonally adjusted)*. All six measures were contracting a year ago, signalling likely economic weakness. In all six cases, the latest six-month change (i.e. to May 2012) is significantly higher than then and also up from late 2011. In five of the six cases, the recent pick-up reflects faster nominal expansion as well as a smaller inflation drag as consumer prices have slowed.

Because of recent volatility in financial sector money holdings (not just “intermediate other financial corporations”), the broad and narrow measures currently preferred here are non-financial M4 and M1, i.e. M4 and M1 held by households and private non-financial corporations. In real terms, these measures rose by 1.3% and 1.1% (not annualised) respectively in the six months to May – the largest increases since April 2009 and January 2010 respectively.

The second chart shows that real non-financial money has predicted recent swings in the economy, with the latest six-month M4 and M1 increases suggesting a return to respectable expansion by late 2012 / early 2013, allowing for the usual lead of six months or so.

A further monetary injection could be argued to be warranted to cement such a prospect but runs the risk of creating “excess” liquidity that will sustain a medium-term inflation overshoot and / or lead to new asset price bubbles and subsequent destructive busts.

*The range does not include the headline M4 measure, which continues to be distorted by declining deposits of economically-irrelevant “intermediate other financial corporations” (IOFCs). (M4 is routinely quoted without qualification by proponents of “radical” monetary easing, such as the FT’s Martin Wolf.) M4 comprises the private sector’s holdings of sterling notes and coin and deposits at UK banks, along with repo claims and bank paper of up to five years’ original maturity. M4ex, the Bank of England’s preferred broad measure, excludes money holdings of IOFCs. “M4ex+”, as defined here, adds foreign currency deposits at UK banks (excluding those held by IOFCs). Retail M4 includes only bank deposits with an advertised rate (i.e. not “wholesale” deposits). M1 comprises sterling notes and coin and sight deposits.