The Money Supply trends suggest more weak economic growth for the Euro area and UK

As we move into July we have been provided with a reminder that the effects of the credit crunch are still with us. That is because the benchmark ten-year yield in France closed for the week in negative territory and is 0% as I type this. It is yet another sign of how weak the overall economic recovery has been as we wonder if we are facing another slow down. Such thoughts will have been reinforced by the manufacturing business surveys conducted by Markit as the PMI for Italy has fallen to 48.4 and Spain to 47.9. The latter is significant on three counts as this number had been showing positive growth before a sharp fall this time around. Also overall the Spanish economy has been the best performer of the larger Euro area economies for a while now.

The overall position was disappointing.

Eurozone manufacturing remained stuck firmly in a
steep downturn in June, continuing to contract at
one of the steepest rates seen for over six years. The disappointing survey rounds off a second
quarter in which the average PMI reading was the
lowest since the opening months of 2013,
consistent with the official measure of output falling
at a quarterly rate of approximately 0.7% and acting
as a major drag on GDP.

Money Supply

The downbeat mood created by the news above was not lifted by this from the European Central Bank or ECB.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 7.2% in May from 7.4% in April.

That means that we have been slip-sliding away from the peak of 7.5% in March. This matters because the narrow money supply has been an accurate signal of economic momentum in the Euro area. In economic theory terms it is a signal of what used to be called excess money balances. If we look for some perspective we see that the more hopeful trend that we had seen in 2019 is fading. As to the overall impulse this rate of growth compares to a peak of 11.7% back in July 2015 In response to the ECB having cut interest-rates into negative territory and pumping up the QE, as from January that year it had begun its first wide-scale program of 60 billion Euros a month.

Indeed of we look back we see some backing for the rumours that the ECB is planning to introduce a new round of QE. That is because we step back in time to January 2015 M1 growth was 6.9% which is not that different to the 7.2% and falling we are seeing now.

Broad Money

This has a different impact to the above which operates about 3 months or so ahead. Broad money growth takes around two years to fully impact which is why central banks target consumer inflation two years ahead. Here is the latest data.

Annual growth rate of broad monetary aggregate M3, stood at 4.8% in May 2019, after 4.7% in April 2019

The picture here is brighter as it has been pretty consistent growth since the nadir of 3.5% in August last year. The catch is that as it is split between growth and inflation we are never really sure what the mix between the two will be. Also if we look at the counterparts breakdown we see that the domestic parts are weak.

credit to the private sector contributed 2.8 percentage points (down from 3.0 percentage points in April),,,,,,,,,,, credit to general government contributed 0.2 percentage point (down from 0.5 percentage point)

In case you are wondering what made it grow it was rather off message as it may well have been the often maligned evil foreign speculators.

net external assets contributed 2.4 percentage points (up from 1.6 percentage points),

I jest slightly but you get the idea.

The UK

The troubling theme continued with the UK data which followed some 30 minutes later. The rate of M4 Lending growth went from 4.1% in April to 3.8% in May and as we do not get narrow money data in the UK it has been the best guide we get. In the detail there was maybe some hope as household money holdings rose.

The total amount of money held by UK households, private non-financial corporations (PNFCs) and non-intermediary other financial corporations (NIOFCs) (broad money or M4ex) increased by £2.9 billion in May (Chart 3). Within this, households’ money holdings increased by £6.5 billion, the largest increase since September 2016. The strength on the month was due to increased flows into non-interest-bearing deposit accounts.

If we switch to the credit side of the ledger then there has been something of a change.

The extra amount borrowed by consumers to buy goods and services was £0.8 billion in May, broadly in line with the £0.9 billion average since July 2018. Within this, additional borrowing for other loans and advances fell on the month to £0.5 billion, and credit card lending increased to £0.3 billion.

The annual growth rate of consumer credit slowed further in May, to 5.6%, reflecting the weaker lending flows seen over most of the past year. This was the lowest since April 2014, and well below the peak of 10.9% in November 2016.

If we just look at the pure data then whilst it is not put this way we seem to be seeing another sign of the slow down in the car market. I would expect that to be the main cause in the fall in other loans and advances and regular readers will recall that a couple of months or so ago the Bank of England explicitly mentioned this.

Moving to the trend it continues to slow albeit that at 5.6% the annual rate of growth is still far higher than anything else in the UK economy at more than triple the rate of economic growth and a bit less than double wage growth. Of course you can take an alternative view as the Bank of England called 8.3% growth slow and assured us only last week that debt has not been a driving force in the UK economic recovery. As she was a success a Glastonbury who better than Kylie to offer a critique of this?

I’m spinning around
Move outta my way
I know you’re feeling me
‘Cause you like it like this
I’m breaking it down
I’m not the same
I know you’re feeling me
‘Cause you like it like this


The monetary impulses in the Euro area and the UK are losing momentum which posts a cloud over economic prospects for the rest of 2019. The end of the world as we know it? No, but a weak growth impulse as we wonder if the opening quarter was as good as it gets for this year.

Meanwhile there was some brighter news from two bits of data from the Euro area earlier. From @LiveSquawk

Eurozone Unemployment Rate (May): 7.5% (est 7.6%, prev 7.6%) – Lowest Since July 2008……Italy Unemployment Rate (MayP): 9.9% (est 10.3%, prevR 10.1%)

The catch is that these are lagging indicators and represent more the growth of 2017 and the first part of last year.

Also let me give you some number crunching from the UK. Remember the Funding for Lending Scheme which started 7 years ago to boost business lending to smaller businesses. Well lending to what are called SMEs is now £166.3 billion whereas unsecured credit rushed past it to £217.3 billion. Or if you prefer monthly growth £0.2 billion for the former and £0.9 billion for the latter. So the reality is pretty much the opposite of the hype.


Just a reminder that this is also on I-Tunes as Notayesmanspodcasts for those who listen to them via that source.



10 thoughts on “The Money Supply trends suggest more weak economic growth for the Euro area and UK

  1. Hello Shaun,

    with this “cruel summer ” for MC and the BoE crew

    I guess as the economic levers are all pulled to the stops , then he’ll have to issue an

    to me M3 and M4 have been show all that inflation that these CB’ers want – after all you cannot eat an Ipad and in the end consumerism needs free cash after essentials such a food , fuel and shelter .

    throw in a house crisis and we’re there 😉

    but I guess the spin doctors will be out in force…


    PS: better with popcorn 😉

    • Hi Forbin

      I always liked Cruel Summer as a song, Perhaps Bananarama could take the legends slot at Glastonbury in the next year or two. As for the Bank of England they are on a road which looks set to have them explaining how a promised interest-rate hike became a cut again.

  2. Shaun,

    To pick up on your quote:

    “The monetary impulses in the Euro area and the UK are losing momentum which posts a cloud over economic prospects for the rest of 2019. The end of the world as we know it?”

    Net lending to individuals in the UK was forecast at £5.1 billion and came out at £3.9 billion is a considerable reduction.

    Manufacturing PMI has been poor lately in the UK & Europe the UK unwinding from BREXIT stockpiling.

    “Manufacturing output has recently slowed across the eurozone, raising questions over the strength of the European economy amid weaker global trade flows as the US-China trade war serves as a brake on growth. Factory output has slipped into reverse in Ireland, Italy, Spain, Austria and Germany.”

    “Howard Archer, chief economic advisor to the EY ITEM Club, said the sharp slowdown in manufacturing output meant the economy likely contracted in the second quarter. ”

    Depends precisely what you mean by “The end of the world as we know it” but if you are thinking what I am thinking UK interest rates will have to be cut soon and maybe lower than the emergency measures at 0.5%.

    The world is slowing down and the UK got BREXIT to consider as well both Borris and Jeremy are already planning to utilise the money the chancellor has saved to assist the economy and I think the BOE will have to react as well.

    Stock markets doing well lately probably pencilling more rate cuts and a sign they are the only places to put cash, you will get nothing in the bank for large amounts of money and in many places offshore bank deposits getting eroded with negative rates.

    I don’t know where this will end up and a new world of economics seems to be around the corner.

    A survey mentioned on the BBC this morning indicates the average spend for a night out in the UK £70 !

    Well this must be either singles living at home or the middle class. I say this because the average gross wage of £25,000 deduct insurance, tax, average of £200 a week to rent a house, car costs or other transport, food clothes and utility bills and a person on the average wage wouldn’t have enough left for fish and chips never mind £70 for a night out.

    Jeeze where is this going to end up? glad I am in the latter stage of my life but feel for the youth these days with social care and pension requirements will place more burden on the young.

    Unless we get a world war to wipe out a percentage of the population food prices will continue to go up due to word demand something got to give.

    • Hi Peter

      What I meant with the REM quote was that the money supply figures suggest a growth slow down rather than a recession. Whilst the manufacturing sector is plainly in one in more than a few countries, it is being offset by other parts of the economy. But there will be countries with quarterly contractions as for example the Bundesbank thinks Germany has just had one and Italy seems on the edge. We in the UK could get one too. If the Atlanta Fed GDP now cast is right then US GDP growth has just halved.

  3. So how much do you spend on a nights out?

    Well on my simple maths if you are the average earner, in rented property and have to pay rates, utilities, clothes, food and transport whether it be by car or train you will not be spending anything like £70, more like a tenth of average spend with a couple of pints at the pub then thumbing a lift home or walking because you cannot afford a taxi.

    If things get much worse than they are now some of those guys who are spending £70 a week will regret it later on when they get a nasty shock if unemployment rises and they cannot pay their way.

    • I think thats little change since 2018

      what is changing is

      house prices static or falling
      jobs being poorly paid – ie mostly zero contract and on min wage rate

      but do not worry , mark is forever vigilant

      look see , what he has his eye on….

      yum, and the least expensive town in the far east too!

      hello, good evening, and expenses



      • Hi Forbin,

        Those fancy delights look delicious but hey they were once in my local Patisserie Valerie which closed down in my town due to a black hole in the accounts.

        Bit like the black hole in many an economy which will get even bigger when the property bubble bursts!

        I remember the day when it was hard to get credit and people would only buy what they could afford!

  4. Pingback: The Money Supply trends suggest more weak economic growth for the Euro area and UK - Free World Economic Report

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