Eurozone real non-financial M1* – the best monetary leading indicator of the economy, with a flawless track record in recent years – continues to signal improving prospects. Real money expansion is now stronger in peripheral economies than the core.

Six-month growth of real non-financial M1 rose to 3.7% (not annualised) in January, equalling November’s result, which was the strongest since February 2010. The six-month change turned negative before the 2008 and 2011 recessions and positive before the 2009 and 2013 recoveries – see first chart. The recent pick-up suggests that industrial output and GDP growth will firm through the late summer (at least).

The ECB publishes country data on overnight deposits, which dominate swings in M1. Six-month growth of real deposits in the peripheral grouping** rose to 3.8% in January versus 2.2% for the core – second chart. Peripheral expansion was lower than in the core in every month between September 2008 and October 2013.

The groupings conceal significant country variation, with Spain now the strongest of the big five, followed by Germany / Italy. French growth is modest but still consistent with an ongoing economic recovery; negative risks are greater in the Netherlands – third chart.

*Notes and coin in circulation plus overnight deposits of households and non-financial corporations divided by consumer prices, seasonally adjusted.
**Greece, Ireland, Italy, Portugal and Spain.

The official estimate of fourth-quarter GDP growth has been maintained at 0.7%, although revisions to earlier quarters have resulted in the annual increase falling from 2.8% to 2.7%. As expected here, services output undershot the 0.4% December rise assumed in the preliminary GDP estimate (increasing by 0.2%); the impact on the quarterly GDP rise, however, was offset by upward revisions to earlier months.

The key takeaway from the details of today’s report is that recent solid growth has been broadly based and balanced, increasing confidence in its sustainability. Consumer spending rose by less than GDP in the year to the fourth quarter – 2.4% versus 2.7%. Investment, meanwhile, soared by 8.7%; business fixed capital formation grew by 8.5%, with a stronger rise in housing investment*. Net exports were little changed over the four quarters – import penetration**, encouragingly, fell. The only negative in the expenditure breakdown was relatively high stockbuilding during the second half of 2013; the stockbuilding numbers, however, incorporate a balancing adjustment and are often revised significantly.

Solid growth is occurring across sectors and most activities: output of services, industry and construction rose by 2.7%, 2.3% and 4.3% respectively in the year to the fourth quarter. Services strength does not reflect finance – output of “financial and insurance activities” actually fell by 1.8% in the latest four quarters, subtracting 0.2 percentage points from GDP growth.

The income breakdown shows a 3.9% nominal rise in total employee compensation – including employers’ social (pension) contributions – in the year to the fourth quarter. The number of employees increased by 1.1% over the same period, according to last week’s labour force survey. So average compensation grew by 2.8% – more than CPI inflation of 2.1% in the fourth quarter***.

Adding in profits and other income, nominal GDP rose by an annual 4.4% in the fourth quarter. With potential output probably growing by less than 2% per annum, this rate of increase is incompatible with achievement of the 2% inflation target over the medium term.

*The difference between total and business investment suggests that the housing component grew by about 12%.
**The import share of domestic demand.
***A fourth-quarter breakdown between wages / salaries and employers’ social contributions is not yet available.

A large rise in US narrow money in the first week of February was only partially reversed the following week. The recent pick-up, if confirmed, suggests improving economic prospects for the second half of 2014.

Bad weather has exaggerated weakness in recent economic data but a slowdown had been expected here, partly reflecting softer monetary trends during the first half of 2013. Six-month growth of real narrow money* fell from 7.4% (not annualised) in December 2012 to 2.7% in June 2013.

Real money expansion, however, stabilised after mid-2013 and picked up to 4.7% in January. Data for the first two weeks of February imply a further increase to 5.5% or more. Underlying economic growth may remain soft through mid-2014 but second-half prospects appear to be brightening.

The chart incorporates a US February estimate along with January and December numbers for Japan and the Eurozone / UK respectively**. US real money expansion fell back into the middle of the pack in 2013 but is now diverging positively again, suggesting economic and equity market outperformance.

Narrow money is held mainly for transactions purposes and changes usually occur ahead of spending variations, explaining its leading properties. US spending plans, in other words, seem to be firming despite QE “tapering”, supporting the view here that QE changes have weak economic effects except under conditions of extreme financial stress.

*Currency plus demand deposits divided by consumer prices.
**January data for the Eurozone and UK are released on 27 February and 3 March respectively.