Why I am expecting a rise in Euro area economic activity

One of the fun parts of being a Notayesman is that such a mindset gives the ability to quickly get on the pace with potential changes in trend. This morning what has been our most reliable indicator over the past couple of years looks like it is providing such an opportunity so let us get straight to it.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 7.4% in March from 6.6% in February. ( European Central Bank or ECB).

This adds to what I reported on the 28th of last month.

Moving onto happier news for the ECB this morning’s money supply release provided a bit of relief.


Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 6.6% in February from 6.2% in January.

As you can see the annual growth rate has now picked up quite a bit as we start our money supply journey in 2019. In isolation this indicates a strengthening of the Euro area economy and returning to my opening theme this represents a change on a consensus which has in many cases only just caught up with our previous narrow money supply trend which led to the Euro area economy singing along with Alicia Keys.

Oh, baby
I, I, I, I’m fallin’
I, I, I, I’m fallin’

Whereas now we have an indicator that there are better prospects for the summer as narrow money supply data looks around 3 months or so ahead. For those of you wondering how this works? The mechanisms here were described by Anna Schwartz some years back.

Because money is used in virtually all economic transactions, it has a powerful effect on economic activity. An increase in the supply of money puts more money in the hands of consumers, making them feel wealthier, thus stimulating increased spending. Business firms respond to increased sales by ordering more raw materials and increasing production. The spread of business activity increases the demand for labor and raises the demand for capital goods.

In my view this works best for narrower measures of the money supply because as she points out it is.

M1, a narrow measure of money’s function as a medium of exchange;

In general it gets spent and boosts nominal GDP. As to the real GDP we really want that tends to go with it unless there is big shift in inflation prospects. That is less likely to happen when we have a shorter time span.

Some Perspective

If we look back on the data we see an annual rate of growth which was last at this level in June last year. Up to then it had been falling from the 9.7% of September 2017. So if sustained we have regained about a third of the decline.

War on Cash

With there being an apparent turn for the better in the narrow money supply this may prove to be a bit like of on the cunning plans of Baldrick from the TV series Blackadder. From Carolyn Look of Bloomberg on Friday.

Fun fact: today was the last day Germany & Austria issued the €500 note. All other € countries stopped in January. Us Germans need a little more time to say goodbye when it comes to cash (but don’t worry, you can still use the ones that are circulating).

Whether that will be something of a brake on the money supply only time will tell, But the official theme that this is to combat money laundering has been torpedoed by the reality of the enormous scale of such activity in the banking sector of the Baltics. As ever no-one is suggesting that part of “the precious” needs eliminating nor are those banks being called “Bin Ladens” as the notes once were.

Broad Money

This too has picked up but March had a disappointing kicker which is explained if we go straight to the detail.

Looking at the components contributions to the annual growth rate of M3, the narrower aggregate M1 contributed 4.9 percentage points (up from 4.3 percentage points in February), short-term deposits other than overnight deposits (M2-M1) contributed -0.1 percentage point (as in the previous month) and marketable instruments (M3-M2) contributed -0.3 percentage point (down from 0.0 percentage point).

The broader elements of the money supply shrank with a small reduction as we move to M2 but a 0.3% one if we move to M3. The latter matters because if we move from the ECB description to the real impact we are looking at a view on bank lending and its prospects.

Thus more of this seems to be on the cards.

 Among the borrowing sectors, the annual growth rate of adjusted loans to households stood at 3.2% in March, compared with 3.3% in February, while the annual growth rate of adjusted loans to non-financial corporations decreased to 3.5% in March from 3.8% in February.

As you can see this weakened although to my mind this is usually a lagging indicator for economic activity which for a while has been reflecting the better economic growth of this time last year.


The obvious question is how much of a pick-up in economic activity is on the cards. We have just seen quarterly economic growth of 0.1% followed by 0.2% on the one hand which was quite a drop on the 0.7% of 2017. But a rally to a period of 0.3%/0.4% in terms of quarterly growth looks on the cards. We can look at that in two ways and the opening view is that it is an improvement. Ironically it is the ECB itself that undercuts this with its view.

In our latest staff projections, the euro area growth outlook for 2019 has been revised down substantially, to an annual growth rate of 1.1%.

Also in line with other central banks it thinks that an annual growth rate of 1.5% is as good as it now gets. I am not sure how that works with the US reporting an annualised growth rate of 3.2% as it did in Friday but Ivory Towers are seldom bothered by such matters.

Looking more specifically we can expect a boost for the Euro area domestic economies as we wait to see what happens on the trade front. To my mind this morning’s surveys for the Euro area mostly reflect the difficult period we have just seen.

Euro area economic confidence falls to its weakest level since September 2016. ( @forexlive)

Another way of looking at it can be provided by services doing okay whilst manufacturing which relies on exports is not doing okay.

Adding to the more upbeat theme is the way the Euro has been depreciating. It rather conveniently went to 100 at the end of September in trade-weighted terms or as Maxine Nightingale sang.

Ooh, and it’s alright and it’s coming along
We gotta get right back to where we started from
Love is good, love can be strong
We gotta get right back to where started from
A ha

It is now 96.5 which is certainly the equivalent of a 0.25% interest-rate cut and maybe a bit more.

My Podcast on QE






18 thoughts on “Why I am expecting a rise in Euro area economic activity

    • its a trick to stoke inflation – everybody who was around at decimalization will remember the price hikes ……

      they said then it would not cause inflation – liars

      they full well know it will cause inflation now .


  1. Hello Shaun,

    I have been wondering on the pensions factor – this month many will see their pension contributions rise by about 3% . Remember last month the MSM crowing about “wage rise” ?


    pay cut time !

    going to get interesting , with that and the drop in orders as de-stocking goes ahead

    throw in a few political monkey wrenches too , yay!


    • Hi Forbin

      The pension contribution changes were a good thing as we pretty much aped the Australian system. But of course it reverses the QE era as this time around we reduce demand now to increase it in the future. I guess Murphy’s Law suggests that whenever it came in there was bound to be a period where it impacted in a slow down.

      One irony is that at present annuity rates the illustrations for what the pension will provide will look rather poor.

  2. Hi Shaun

    The EZ are running a trade surplus of around $ 400 bn.

    This surplus might indicate a sensitivity to events outside the EZ and they appear to be lukewarm at best. China seems to be on a declining path and this could be of some significance to the EU if it gets any worse.

    Time will tell.

    • Hi Bob J

      I agree that this depends to some extent on what happens elsewhere. China has been easing policy but there are doubts about the veracity of some of the recent numbers.

      “China industrial profit in Q1 2019 (Jan +Feb + March): -3.3% YoY Ytd according to NBS %YoY but if you take the level provided by NBS & calculate %YoY ytd then it is -16.5% for Q1.” ( @Trinhnomics )”

      So the external factor is a concern as you say but the money supply suggests a pick-up in domestic consumption.

  3. Meanwhile back in the “just thinkin’ about it-no biggy” news items: Fed reserves floating idea of a “standing repo facility” to allow banks to exchange treasuries for reserves. The meercat raises his head and sniffs ” I smell three card monte”. The NY merry munchkins are up to something. What are they up to?!? What’s important to know!! Back to the screen cave. As former bossman said: “It’s like ‘Nam-you gotta wake up every morning and sense the danger- or your a goner (high margin=quick profit or wipeout)

  4. The NEW fed aerosol is called “debtbegone”. Just spray and “Poof”
    “Everything smells fresh, clean and clear now!! It works like magic”. Now available in “wintergreen”. (smiles all around!!)

  5. Deutsche Bank (and Bear Stearns) were running a circa 1944 type u-boat operation (for you don’t talk about the war buffs).
    The moment they communicated their position, if they were with range they got depth charged. The only people that didn’t believe this was management. This is trading today. Best to be a like a rodent, scurry in grab a morsel, scurry back in your
    hole. Quiet. Small. Silent. In the dark. Too small to attract attention!!

    • Hi Canuckistinian

      So the Nick Leeson ( my replacement at Baring Securities) error. He did not realise that if you go over a certain open interest in futures markets then some exchanges declare it. For what it is worth I think it was 3%, but whatever, suspicions became knowledge and you can guess the rest,,,

  6. Hi Shaun,
    About the war on cash – Smallest denomination in NZ is 10 cents (worth a little over 5 pence).; but EFTPOS is very popular here so most people don’t seem concerned by not having any “copper” coins in their loose change.

  7. Some of the crypto-(quadriga-cx/2 posts on reddit-tells the story)-if they haven’t been purged-now AG is after bitfinex panama- multiple characters-multiple agendas-all wash trading-now on to tsx pot stocks-don’t ask me want I think of the Ontario Securities Commission (muskoka golfing committee)- but as the pimp said to Tom Cruise in “Risky Business”- don’t f+ck with a guy’s way of making a living”-such a shadow play of allusions-pre-tirement beckons- but the art Deco renovated library in every city is looking like the church in Soylent Green

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