Euro area money supply is booming again

In ordinary times the 25 members of the Governing Council of the European Central Bank would be getting ready to go to Frankfurt. This time though, they may well be making sure their version of Zoom works properly.I do hope they are not using Zoom itself as it is not secure meaning that the hedge funds will be listening in again. As to there being 25 members it has an Executive Board of 6 as well as a representative of each country. Rather confusingly not all vote as there are too many to sit around the ECB table and around 4 drop out with the most significant being the Netherlands this time around. But as the main decisions have already been made and only perhaps some fine tuning in the offing that is a moot point this week.

Money Supply

This morning has brought news on past decisions however. In the melee it is easy to forget that before the pandemic the ECB had restarted QE and then fired something of a peashooter on the 12th of March.

A temporary envelope of additional net asset purchases of €120 billion will be added until the end of the year, ensuring a strong contribution from the private sector purchase programmes

So strong in fact that only 6 days later they announced this.

This new Pandemic Emergency Purchase Programme (PEPP) will have an overall envelope of €750 billion. Purchases will be conducted until the end of 2020 and will include all the asset categories eligible under the existing asset purchase programme (APP).

These will have fed into the March data because the PEPP began on the 26th and the original much more minor “strong contribution” will have been in play for around half of the month. So what impact did they have?

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 10.3% in March from 8.1% in February.

Putting it another way M1 increased by 273 billion Euros to 9335 billion in March. As this replaced 24 billion in January and 89 billion in February we see two things The accelerator was already being pressed but then the foot pressed down much harder. As an aside cash rose by 26 billion in March which backs up to some extent my argument of yesterday about it. A clear rise but of course only one month.

Broad Money

As you can see this soared as well.

Annual growth rate of broad monetary aggregate M3, increased to 7.5% in March 2020 from 5.5% in February.

If we take the advice of Kylie ( I’m breaking it down) we see this.

Looking at the components’ contributions to the annual growth rate of M3,, the narrower aggregate M1 contributed 7.0 percentage points (up from 5.5 percentage points in February), short-term deposits other than overnight deposits (M2-M1) contributed 0.0 percentage point (up from -0.1 percentage point) and marketable instruments (M3-M2) contributed 0.5 percentage point (up from 0.1 percentage point).

So we see that the QE push is such that this time around broad money is effectively narrow money. We can ignore M2 which is doing almost nothing but then we see marketable instruments are in the game as well albeit more minor at 34 billion Euros. Indeed this is almost entirely debt-securities with a maturity of up to two years. I am picking them out because their total is only 60 billion so they have seen more than a doubling in one month.

Counterparts

We can do this almost MMT style and do indeed learn a thing or two.

the annual growth rate of M3 in March 2020 can be broken down as follows: credit to the private sector contributed 4.5 percentage points (up from 3.7 percentage points in February), net external assets contributed 2.1 percentage points (down from 2.7 percentage points), credit to general government contributed 0.6 percentage point (up from -0.7 percentage point), longer-term financial liabilities contributed -0.2 percentage point (up from -0.5 percentage point), and the remaining counterparts of M3 contributed 0.4 percentage point (up from 0.3 percentage point).

Care is needed as this sort of application of mathematics to economics is invariably presented as a type of Holy Grail followed by the sound of silence when it then goes wrong. But we do see that the credit impulse is now much more domestic as the foreign flows decline in absolute percentage terms and then have a second effect of being compared to a larger number.

What about credit flows?

The initial impact is a swing towards the public sector as we see credit there taking quite a move.

As regards the dynamics of credit, the annual growth rate of total credit to euro area residents increased to 3.5% in March 2020 from 2.0% in the previous month. The annual growth rate of credit to general government increased to 1.6% in March from -2.0% in February, while the annual growth rate of credit to the private sector increased to 4.2% in March from 3.4% in February.

The growth rate had been negative since last June and I expect quite a surge now because it was 15.7% at its peak in the credit crunch and we see so much fiscal policy being enacted.

Switching to the private-sector we lack the detail to really take a look.

The annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitisation and notional cash pooling) increased to 5.0% in March from 3.7% in February. Among the borrowing sectors, the annual growth rate of adjusted loans to households decreased to 3.4% in March from 3.7% in February, while the annual growth rate of adjusted loans to non-financial corporations increased to 5.4% in March from 3.0% in February.

We learn a couple of things. There will be a lag before we pick up the fall in mortgage lending and new business lending was a record.

New bank loans to euro area non-financial corporates in March: +€118bn. Previous record was €66bn in December 2007………French banks were the largest contributors (€38bn in new corporate loans out of €118bn total) but the rise was fairly broad-based: Germany €22bn; Italy €17bn; Spain €16bn. ( @fwred)

This goes as follows. Good as banks are lending to companies but then Bad as we think why they want it and can they pay it back?!

Comment

These numbers matter because they give us a good idea of what is coming around the economic corner. For example narrow money growth impacts the domestic economy in somewhere between a few months and six months ahead. We have not seen double-digit-growth for a while and when we last did we got the Euro boom of 2017/18. Except these are about as far from ordinary times as we have seen and we are seeing the carburetor being flooded with petrol and the economy stalling. Putting it back into monetary terms velocity seems set to collapse again.

Another perspective is provided by the “pure” broad money growth which is the monetary equivalent of incestuous. Why? Well those short-term securities look as if they might be designed to be bought by the PEPP programme.

To expand the range of eligible assets under the corporate sector purchase programme (CSPP) to non-financial commercial paper, making all commercial papers of sufficient credit quality eligible for purchase under CSPP.

(3) To ease the collateral standards by adjusting the main risk parameters of the collateral framework. In particular, we will expand the scope of Additional Credit Claims (ACC) to include claims related to the financing of the corporate sector.

More recently there has been this.

ECB to grandfather until September 2021 eligibility of marketable assets used as collateral in Eurosystem credit operations falling below current minimum credit quality requirements

In case you are wondering why? I am thinking Italy and Renault but I am sure there are others.

Moving on let me highlight a catch in this Such programmes will help big business but what about the smaller ones? We are back to the zombie culture and perhaps zombie money supply growth.

 

The ECB is now resorting to echoing Humpty Dumpty

Focus has shifted to the Euro area this week as we see that something of an economic storm is building. For a while now we have seen the impact of the trade war which has reduced the Germany economy to a crawl with economic growth a mere 0.4% over the past year. Then both Italy (0.3%) and France ( 0.1%) saw contractions in the final quarter of 2019. Now in an example of being kicked when you are down one of the worst outbreaks of Corona Virus outside of China is being seen in Italy. Indeed the idea of Austria stopping a train with people from Italy suspected of having the virus posed a question for one of the main tenets of the Euro area as well as reminding of the film The Cassandra Crossing.

Tourism

This is a big deal for Italy as The Local explained last summer.

Announcing the new findings, ENIT chief Giorgio Palmucci said tourism accounted for 13 percent of Italy’s gross domestic product.

The food and wine tourism sector continued to be the most profitable of all.

The study’s authors found that “the daily per capita expenditure for a food and wine holiday is in fact in our country is about 117 euros. Meanwhile it was 107 for trips to the mountains and 91 on the coast.”

The numbers were for 2017 and were showing growth but sadly if we look lower on the page we come to a sentence that now rather stands out.

Visitor numbers are only expected to keep growing. Many in the tourism industry predict 2019 will busier than ever in Italy, partly thanks to a growing Chinese tourism market.

Maybe so, but what about 2020? There have to be questions now and Italy is not the only country which does well from tourism.

Tourism plays a major role in the French economy. The accommodation and food  services sector, representing the largest part of the tourism sector, accounts for between
2.5% and 3% of GDP while the knock-on effects of tourism are also felt in other sectors, such as transport and leisure. Consequently, the total amount of internal tourism
consumption, which combines tourism-related spending by both French residents and non-residents, represents around 7.5% of GDP (5% for residents, 2.5% for non-residents). ( OECD)

Spain

The Gross Domestic Product (GDP) contribution associated with tourism, measured through the total tourist demand, reached 137,020 million euros in 2017. This figure represented 11.7% of GDP, 0.4% more than in 2016. ( INE )

Last summer Kathimerini pointed out that tourism was not only a big part of the Greek economy but was a factor in its recent improvement.

Tourism generates over a quarter of Greece’s gross domestic product, according to data presented on Wednesday by the Institute of the Greek Tourism Confederation (INSETE). The data highlight the industry’s importance to the national economy and employment, as well as tourism’s quasi-monopolistic status in the country’s growth.

According to the latest figures available, at least one percentage point out of the 1.9 points of economic expansion last year came from tourism.

It wondered whether Greece relied on it too much which I suspect many more are worried about today, although fortunately Greece has only had one case of Corona Virus so far. It not only badly needs some good news but deserves it. After all another big sector for it will be affected by wider virus problems.

That also illustrates the country’s great dependence on tourism, as Greece has not developed any other important sector, with the possible exception of shipping, which accounts for about 7 percent of GDP.

Economic Surveys

Italy has released its official version this morning.

As for the business confidence climate, the index (IESI, Istat Economic Sentiment Indicator) improved passing from 99.2 to 99.8.

That for obvious reasons attracts attention and if we look we see there may be a similar problem as we saw on the Markit IHS survey for Germany.

The confidence index in manufacturing increased only just from 100.0 to 100.6. Among the series included
into the definition of the climate, the opinions on order books bettered from -15.5 to -14.3 while the
expectations on production decreased from 5.6 to 4.7

As you can see the expectations  for production have fallen. Perhaps we should note that this index averaged 99.5 in the last quarter of 2019 when the economy shrank by 0.3%

France had something similar yesterday.

In February 2020, households’ confidence in the economic situation has been stable. The synthetic index has stayed at 104, above its long-term average (100).

This continued a theme begun on Tuesday.

In February 2020, the business climate is stable. At 105, the composite indicator, compiled from the answers of business managers in the main market sectors, is still above its long-term mean (100). Compared to January, the business climate has gained one point in retail trade and in services.

Really? This is a long-running set of surveys but we seem to be having a divorce from reality because if we return to household confidence I note that consumption fell in December.

Household consumption expenditure on goods fell in December (–0.3%) but increased over the fourth quarter (+0.4%).

Money Supply

This may give us a little clue to the surveys above. From the ECB earlier.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 7.9% in January, compared with 8.0% in December.

Whilst the number has dipped recently from the two 8.4% readings we saw in the latter part of 2019 it is much better than the 6.2% recorded last January. So maybe the surveys are in some sense picking an element of that up as the interest-rate cut and recommencement of QE bond buying feeds into the data.

Comment

If we switch to the ECB looking for clues as to what is happening in the economy then I would suggests it discounts heavily what the European Commission has just released.

In February 2020, the Economic Sentiment Indicator (ESI) increased in both the euro area (by 0.9 points to 103.5) and the EU (by 0.5 points to 103.0).

 

 

That does not fit with this at all.

GERMANY’S VDA SAYS CORONAVIRUS IS AFFECTING SUPPLY CHAINS OF CAR MANUFACTURERS AND SUPPLIERS ( @PriapusIQ )

Anyway the newly appointed Isabel Schnabel of the ECB has been speaking today and apparently it is a triumph that its policies have stabilised economic growth somewhere around 0%.

Although the actions of major central banks over the past few years have succeeded in easing financial conditions and thereby stabilising growth and inflation, current and expected inflation rates remain stubbornly below target, in spite of years of exceptional monetary policy support.

Next she sings along with The Chairmen of the Board.

Give me just a little more time
And our love will surely grow
Give me just a little more time
And our love will surely grow

How?

This implies that the medium-term horizon over which the ECB pursues the sustainable alignment of inflation with its aim is considerably longer than in the past.

Another case of To Infinity! And Beyond! Except on this occasion we are addressing time rather than the amount of the operation which no doubt will be along soon enough.

Indeed she echoes Alice in Wonderland with this.

For the ECB, this means that the length of the “medium term” – which is an integral part of its definition of price stability – will vary over time.

Which sounds rather like.

When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.” “The question is,” said Alice, “whether you can make words mean so many different things.” “The question is,” said Humpty Dumpty, “which is to be master—that’s all.”

Although briefly she seems to have some sort of epiphany.

central banks often have only a limited understanding of the precise configuration of the forces

But it does not last and as ever I expect the result to be even lower interest-rates and more QE as the “lower bound” she mentions gets well er lower again.

Some of this is beyond the ECB’s control as there is not much it can do about a trade war and nothing about a virus outbreak. But by interfering in so many areas it has placed itself in the game and is caught in a trap of its own making. Or returning to The Chairmen of the Board.

There’s no need to act foolishly
If we part our hearts won’t forget it
Years from now we’ll surely regret it