Eurozone monetary trends have been suggesting an economic slowdown through end-2021. A recent moderation of consumer price momentum, however, has stabilised six-month real narrow money growth, hinting at a bottoming out of business surveys and other coincident indicators in early 2022.

The Ifo manufacturing survey is a timely indicator of German / Eurozone industrial momentum, displaying a strong contemporaneous correlation with German / Eurozone manufacturing PMIs (but with a longer history). The business expectations component peaked in March, falling for a fifth month in August – see chart 1.

Chart 1

The March peak is consistent with an August 2020 peak in Eurozone six-month real narrow money growth. The implied seven-month lead is slightly shorter than the historical average – the correlation between Ifo business expectations and Eurozone real money growth is maximised by applying a nine month lag to the latter.

Real narrow money growth, however, has moved sideways since May (July money numbers were released yesterday). The suggestion is that the Ifo indicator – along with PMIs and other business surveys – will weaken further during H2 but bottom out in early 2022.

The recent stabilisation of real money growth is not entirely convincing: nominal money trends continued to weaken in June / July but this was offset by a slowdown in six-month consumer price momentum – chart 2.

Chart 2

The inflation slowdown, however, could extend, assuming that commodity prices (in euro terms) stabilise at their current level – chart 3.

Chart 3

A recovery in nominal money growth is required to warrant shifting to a positive view of economic prospects. Such a signal would relate to H1 2022 – earlier real money weakness has “baked in” likely economic disappointment over the remainder of 2021.

What could lift money growth? The most likely candidate is a pick-up in bank lending. Six-month growth of loans to the private sector recovered in July – chart 2 – while the most recent ECB bank lending survey reported the strongest expectations for credit demand since 2016.

The recent stabilisation of Eurozone six-month real narrow money growth contrasts with a further slowdown in the US – chart 4. The divergence / cross-over suggests improving Eurozone relative economic and equity market prospects, although US real growth could benefit from a faster inflation slowdown over coming months.

Chart 4

A further fall in Ifo manufacturing business expectations and other survey indicators during H2 would probably be associated with underperformance of European non-tech cyclical sectors relative to defensive sectors – chart 5.

Chart 5

Detailed monetary data for July released yesterday suggest that recent policy easing is beginning to support money growth, in turn hinting at a recovery in economic momentum from end-2021.

A sustained slowdown in six-month narrow money growth from July 2020 correctly signalled “surprise” Chinese economic weakness so far in 2021. The expectation here was that the PBoC would ease policy in Q2, supporting economic prospects for later in 2021. Adjustment was delayed but the reserve requirement ratio cut on 9 July appeared to mark a significant shift. The hope was that July monetary data would confirm a bottom in money growth.

The headline July numbers released on 11 August seemed to dash this hope, with six-month of “true M1” falling to a new low – see chart 1*.

Chart 1

The additional data released yesterday allow a breakdown of the deposit component of this measure between households, non-financial enterprises and government departments / organisations. It turns out that the further fall in growth in July was due to the latter public sector element, which is volatile and arguably less important for assessing prospects for demand and output.

Six-month growth of “private non-financial M1”, i.e. currency in circulation plus demand deposits of households and non-financial enterprises, rose for a second month in July. So did the corresponding broader M2 measure – chart 1.

This improvement needs to be confirmed by a recovery in overall narrow money growth in August, ideally accompanied by a further increase in the private sector measure. One concern is that the rebound in the latter has so far been driven by the household component – enterprise money growth remains weak.

Increased bond issuance and fiscal easing could lift public sector money growth during H2.

The corporate financing index in the Cheung Kong Graduate School of Business monthly survey is a useful corroborating indicator of money / credit trends – a rise signals easier conditions. The index bottomed in March but has yet to improve much – chart 2. August survey results will be released shortly.

Chart 2

*True M1 includes household demand deposits, which are omitted from the official M1 measure.