One of the features of the credit crunch era is that conventional economics not only clings at times desperately to theories that do not work but also looks the other way from ones which do. I have been reminded of that this morning as I look at the money supply data for the Euro area and note that there is not many of us who publicise it on social media. That is a shame as it has been working pretty well as a signal for economic trends in recent times. The experiments of the 1980s especially in the UK where money supply data was taken very literally taught us to use it for broad trends rather than exact specifics. But the broad trends have sent accurate signals which brings us to this mornings clues as to what will happen next in the Euro area?
Broad Money
From the European Central Bank or ECB.
The annual growth rate of the broad monetary aggregate M3 decreased to 4.0% in July 2018 from 4.5% in
June, averaging 4.1% in the three months up to July.
So the opening salvo returns us to thoughts of an economic slow down. If we look back for a general trend we see that the monetary stimulus lifted M3 growth to around 5% and it rumbled on around that sort of growth in 2016 and 17 with several peaks at 5.2% the most recent being last September. But December 2017 gave a warning as growth fell to 4.6% and this year has seen a clear dip especially when growth fell below 4% in March and April. June gave a hint of a recovery and ironically has been revised up to 4.5% but July has sunk back to 4%.
The rule of thumb is that looking ahead this is the trend for nominal GDP growth which provokes an awkward thought. If 4% is the new trend and the ECB hits its 2% inflation target as it is roughly doing now then annual GDP growth should also be 2%. So the “Euroboom” will continue to fade. Also of note is the fact that in 2016/17 the ECB achieved a level of broad money growth which would be consistent with nominal GDP growth of 5% which we have seen several Ivory Towers make a case for. That may well have been the signal used for deciding the amount of QE bond purchases and other credit easing.
The overall growth can be broken down as follows.
the annual growth rate of M3 in July 2018 can be broken down as follows: credit to the private sector contributed 3.3 percentage points (up from 3.2 percentage points in
June), credit to general government contributed 1.4 percentage points (down from 1.5 percentage points),
longer-term financial liabilities contributed 0.7 percentage point (down from 0.8 percentage point), net
external assets contributed -0.7 percentage point (down from -0.4 percentage point), and the remaining
counterparts of M3 contributed -0.8 percentage point (down from -0.6 percentage point).
I would counsel taking care with such numbers as this sort of mathematical economics is always advanced confidently by its proponents who in my experience become somewhat elusive when as happens so often it ends in tears.
Narrow Money
This is usually a much more direct line of impact on the economy of say a few months ahead as opposed to the a year plus of broad money. Accordingly this month’s release is not optimistic.
The annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, decreased to 6.9% in July from 7.5% in June.
This is the lowest number for the series so far in this phase eclipsing the 7% of April. Overall the annual rate of growth has been falling for a while now. The double-digit growth of late 2015 and early 2016 drifted into single digits but it has been this year where a clear move lower has been seen. The 8.8% of January was followed by 8.4% and 7.5% and now we seem to be circa 7%.
The difference?
People ask for breakdowns and definitions of the above so here we go.
- M1 is the sum of currency in circulation and overnight deposits;
- M2 is the sum of M1, deposits with an agreed maturity of up to two years and deposits redeemable at notice of up to three months; and
- M3 is the sum of M2, repurchase agreements, money market fund shares/units and debt securities with a maturity of up to two years. (ECB)
Putting that into numbers at the end of July M1 was 8050 billion Euros of which 1136 billion was cash/currency and the rest was overnight deposits. Moving to M2 brings us up to 11,486 billion Euros as we add in time deposits and more technical additions brings us to 12,130 billion Euros.
Negative Interest-Rates
The financial media often points us to the 0% current account rate of the ECB and looks away from the -0.4% deposit rate but some find it applying to them. From Handelsblatt.
Frankfurt Starting in September, Hamburger Sparkasse (Haspa) intends to charge private customers a fine of 0.4 percent for deposits of more than € 500,000. This applies to checking and overnight money accounts. The second largest German savings bank after Berlin reacts to the European Central Bank (ECB) , which in turn charges the banks negative interest-rates , which park money at short notice.
Handelsblatt goes on to tell us that around a dozen savings institutions are now applying negative interest-rates. There has been a slow spread of this since the first one to break ranks did so in the summer of 2016. This reinforces our theme that banks are in fact very nervous about what would happen to deposits if they fully applied negative interest-rates which has mean that relatively few have applied them. Also the way that they are usually applied to larger deposits means they are particularly afraid of applying them to the European equivalent of Joe Sixpack. In addition a lesson from the mortgage rates we looked at on Friday is that banks soon adjust margins to keep them out and usually well out of the negative zone as well.
Thus the fears about the profitability of “the precious” have proved mostly unfounded and in my opinion negative interest-rates would need to go deeper to change this. Past say -1% towards -2%.
Comment
The monetary data suggests not only that the “Euroboom” is over but that the trajectory looks downwards. As it happens that seems to coincide with monetary data for elsewhere in the world for July so a general trend may be in play as we wait a day or two for the UK data. For the ECB and its President Mario Draghi this has a couple of elements. The elephant in the room today has been the reduction in the QE ( Quantitative Easing) bond purchases which have fallen to 15 billion Euros a month from a peak of 60 billion. That has been a factor in the monetary slowing although how much puts us in a chicken and egg situation as it should be crystal clear but rarely is.
In a technical sense that may suit the ECB as it can slap itself on the back for its role in the better economic growth phase for the Euro area. But also it revives my argument that there has been an element of junkie culture here because if growth fades away as the sugar supply is reduced then all the talk of reform fades away too. With Germany running a fiscal surplus it will be less easy to fire up the QE engine looking forwards as there will be fewer bunds to buy and many are have remained at negative yields. There may well of course be plenty of Italian bonds to buy but that is a potential road to nowhere for the ECB.
Looking ahead the battle has begun to be the next ECB President but as the Bank of England may be about to show the earth can move in mysterious ways.
Carney reportedly asked to remain governor of BOE until 2020 ( @RANsquawk )
Although the ECB itself seems keen to emphasise other matters.
Notayesmanseconomics's Blog 
Shaun,
Dark clouds were already gathering on the horizon before you posted this data and there was also more worrying data from China very recently over debt levels.
This data fits in with my overall view of global growth which looks like it is slowing.
With a HARD BREXIT looking more likely despite a bounce back in UK GDP I think the UK will slow down the last quarter.
Hi Peter
We have to wait until Thursday for the UK money supply and credit data set for July. The pattern has been similar to the Euro area in the sense that it has been weak or at least the money supply has been. Unsecured credit has remained strong though.
Shaun – good post, I especially like the focus on monetary supply, of course you note we need to careful about being too mathematical on these as they are highly subject to the Lucas critique among other issues. But overall NGDP for the Euro area does look like slowing. Probably though won’t have too much of a dramatic effect for the so called core areas (Germany, Benalux, France) as the have a big component of export, but it definitely will continue the misery in the periphery. Of course this won’t prevent the FT from preaching to the UK about what a disaster Brexit will be without Mother EU to look after us.
Just to pull you up a bit on the old QE being a “sugar stimulus”. Not really, in a “normal” economy (i.e. where we see long term interest rates in the plus 4 or 5% range) and inflation in the range 2 to 3% we would have nominal growth of 7 to 8%. So overall money supply (as broadly defined) must also be growing by that same amount (by good old NGDP=PQ=MV identity, and assuming V constant). As you point out current Euro supply growth is much less than this – so what we are on is actually a low carb diet, not a sugar rush diet. Again, if you want to see high interest rates you need to create high inflation expectations, and creating high inflation means printing money and spending it. That is what a “sugar rush” economy looks like.
It is interesting that when Friedman was writing Free to Choose in 1980, his analysis said that M3 growth divided by about 3 produced the inflation rate – thus a rate of 2% would necessitate 6% M3 growth (or when I decided to go to South America in 1988, it was 25% M3 growth, which implied 8% inflation 18 months out and thus higher interest rates). Now it is M4 growth plus interest rates = nominal GDP growth (being real growth plus inflation around 2% as targetted).
davidhollins:
Does that imply that you trust inflation figures, bearing in mind that 2% is the inflation target after all official chicanery?
No, but even given the fiddles, then the trend and relationship to M3 (which is itself not that easy to measure) should at least be consistent. The 25% M3 in 88 did produce inflation around 8-9% 18 months later and the crash-inducing interest rate rises that had begun while I was in Bolivia.
“Never believe anything until it is officially denied”.
Yes Shaun, you are right, Carney has been asked to stay on to maintain the housing bubble, the collpase of sterling and lay the groundwork for the adoption of the euro as our new currency, but then the treasury deny it!!!
https://www.telegraph.co.uk/business/2018/08/28/bank-england-governor-mark-carney-asked-stay-help-navigate-brexit/
https://uk.reuters.com/article/uk-britain-eu-carney/treasury-denies-report-it-asked-carney-to-stay-longer-at-boe-idUKKCN1LD149
There were a couple of interesting items in yesterday’s GARP newsletter (Global Assoc of Risk Professionals). The first was that: “Australian banks may face criminal charges” – so obviously old habits die hard!
The second from Bloomberg, reporting a note from Goldman Sachs, was rather more important. One under-appreciated indicator is flashing red for some developed markets, Goldman Sachs analysts say.
The private-sector financial balance — an economy’s total income minus the spending of all households and businesses — has proven more powerful in predicting crises than the current-account balance, Goldman analysts led by Jan Hatzius, the bank’s global head of economics, wrote in an Aug. 23 research note. “The good news is that the biggest developed economies (U.S., the Euro area, and Japan) — are all running healthy private sector surpluses … “The not-so-good news is that some of the smaller DM economies — especially Canada and the U.K. — are running sizeable deficits and appear vulnerable to higher interest rates and weaker asset markets.”
No prizes of course for guessing the common factor between Canada and UK regarding with asset price bubbles!
Goldmans continued: “A private-sector deficit means households and firms can’t finance their current spending with current income and rely on net borrowing or asset sales … That makes growth and financial stability more vulnerable in an environment of rising rates or market declines.”
A private-sector surplus is a strong predictor of growth. Tallying 17 developed economies from the mid-1980s to the present, Goldmans show that when the private sector balance is 1 percent of GDP higher, the GDP relative to potential rises about 0.4 percentage point faster in the ensuing three years — an impact that they judge “economically large.” A large private-sector deficit is a more reliable indicator than either debt growth or asset prices. This gauge is also seen as outperforming the current account balance as a crisis predictor because focusing on the private sector better measures the risk of “bouts of speculative mania.”
So, given that M3/4 growth has a big credit component and indeed, the UK has only surpassed Germany in growth terms during credit booms (especially under Lawson) , money supply growth might actually be better at a lower level in turbulent times (especially with the tariff wars and developing markets’ issues). Then as I mentioned the other day, there is the liquidity trap level and the northern eurozone level is certainly lower than the UK’s, so any excess UK credit growth is finishing up in the “bout of speculative mania” which Goldmans refer to. steady as she goes through the end of the crisis, especially as recession is looking likely in the next 12-18 months, while running the private sector surplus might well be a better sign at least in terms of recovery from the next recession.
The BoE agent will apparently be coming to Glasgow in October, so Edinburgh should follow soon after – might put Goldman’s comments to her – along with the candidacy of Steve priest for Governor!
Hi David
The origin of the Mark Carney story was the Evening Standard whose editor appointed him in the first place so perhaps there was mischief in the air! As to replacements I think that the Telegraph has mostly lost the pot here but it is a mad mad world according to Tears for Fears.
Steve then …..
Capitalism is dying say a group of Finish researchers makes interesting reading:-
http://www.dailymail.co.uk/news/article-6105733/Capitalism-dying-focused-short-term-profit-scientists-warn-UN.html
Many a economist thought capitalism had come to an end a decade ago and lets face it this forum has debated on living standards not improved since the financial crisis a decade ago.
To go debate this matter further the Guardian is quite sceptical on wage growth in the UK as not being rosy at all.
The world does not have infinite resources we saw that a few years ago the cost of food going up due to the Chinese eating better following the high growth and better jobs.
https://www.theguardian.com/business/grogonomics/2018/aug/28/long-term-unemployment-rates-show-the-jobs-picture-is-not-so-rosy
I am not a economist but its not a precise science in any event, but the world cannot continue to fuel growth with unsustainable debt.
Sooner or later there will be another financial crisis and I think sooner than later.
Another topic by the Guardian on the growth in the UK Danny Blanchflower critical of BOE rate rise.
https://www.theguardian.com/business/2018/aug/28/talk-of-a-no-deal-brexit-and-an-interest-rate-rise-dampen-the-economy
Hi Peter
Thanks for the link as there is some classic Danny there.
“The big news of the month was the increase in rates by the Bank of England, which was a major error that will inevitably have to be reversed………..I can see no data from the real world that sustains a rate rise. If anything the evidence suggests a rate cut would have been more appropriate because of the downside risks to the economy from Brexit. ”
The casual observer might miss the fact that in recent times it was an interest-rate cut ( strongly supported by Danny) that had to be reversed! It seems that fact still stings…..
As to the timing issue I agree we should have raised rates after Carney promised it at Mansion House back in the summer of 2014.
Hello Shaun,
I noticed in my selling on eBay that the UK market softened from May on wards . Buyers were fewer and prices you could sell at dropped. Conversely a far number of sellers seemed to have pushed up their prices – I have not seen their stuff move but we’ll see through September if that changes ….
As for inflation things like sugar tax and pound weakness have lead my food price basket up by 12/14% on many items , this was closer to 5% for aggregate past 5 years .
Given I’m in the job seekers market a strange trend I have seen is that actually employers are REDUCING their wage offers in job postings, seemly at 10/20% for my technical field .
Which is in counter point to the CBI claims that they need more immigration – perhaps they are just looking after number 1 , in that they see an opportunity to blag the British worker yet again*.
All anecdotal I know but if the Western economies cannot work with out QE then it’s inevitable we will seen not so much as a recession , but a depression looming , Brexit or not .
Interesting times indeed
Forbin
* I have been noted for my lack of respect for British top level management , more akin to pirates and thieves ( Libor , Sir Fred ) . First thing they always complain of is lack of talent and wages are too high – although the lack of talent in their ranks seems not to matter one iota. As for their own inflated wages – enough said !
Strange things are afoot, but employees are almost like assets in some ways. Look at the English Premier League, which is awash with cash. There has not been much of an increase in demand as squads are not much bigger than twenty years ago, but there has been a huge increase in supply, especially from immigrant labour. So, their pay has moved up in line with their asset value and managers are always on about having money with which to buy top players. Alex Ferguson made his name at Aberdeen by building a youth set-up and did the same thing at Man Utd, so that his best ever team was arguably the class of 92 just as the Premier League began.
There is a fundamental idleness among rec cons and HR people, so they are really like estate agents in moving assets around, while company training is just shocking. So, like football, it is a case of whom can they buy in at what price, which enables them to create artificial shortages and also to use age discrimination to get away with it.
Anyway, we are rather digressing from today’s subject so I will just add that Greek banks can no longer sell their junk bonds to the ECB under the waiver scheme on asset quality purchase. Greek banks have the worst level of bad loans in the EU, so this is either a sign of optimism or the banks will be bust soon.
oh dear Dave,
any sign of the TBTF banks going bust then the QE taps will be opened again
presumably under another inventive name
Forbin
Hi Forbin,
An interesting point you make there, as the industry I work in also has a huge shortage of experienced and qualified personel and demand is increasing, yet over the last couple of years wages of positions advertised have definitely been dropping. Something is definitely going on, the conspiratorial possibilities are endless, but free market capitalism it ain’t.
Forbin
“Given I’m in the job seekers market a strange trend I have seen is that actually employers are REDUCING their wage offers in job postings, seemly at 10/20% for my technical field .
Which is in counter point to the CBI claims that they need more immigration – perhaps they are just looking after number 1 , in that they see an opportunity to blag the British worker yet again*.
They want more cheap labour ( immigration) to increase productivity which should increase profits and hopefully more pay for those at the top!
Those in the middle getting squeezed!
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