A feature of the credit crunch era has been its ability to surprise. Mostly on the downside but not always. This week opened with concerns about the trade war situation and then saw a couple of bad news episodes about Germany. From dw.com.
German business confidence fell more than expected during August, the Munich-based Ifo institute said on Monday. Ifo said its business confidence index — based on a survey of 9,000 firms — fell to 94.3 points this month from 95.7 points in July.
A deterioration was seen both in managers’ views of the current situation and in their predictions for the next six months.
The main driver of this was not a surprise.
Manufacturing: Satisfaction with the current situation declined to new lows, Ifo said, saying: “Not a ray of light was to be seen in any of Germany’s key industries.”
Then we got confirmation of past bad news.
In the second quarter of 2019, the real (price-adjusted) gross domestic product (GDP) was down 0.1% from the preceding quarter, after adjustment for seasonal and calendar variations…….Real GDP stagnated year on year. After calendar adjustment, GDP was up by 0.4% because the second quarter of 2019 had one working day less than the same quarter a year earlier.
There was also some further detail.
After seasonal and calendar adjustment,price-adjusted exports were down 1.3% from the preceding quarter, markedly more than imports (-0.3%).
However the downbeat news was reversed somewhat this morning as the ECB released this.
Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 7.8% in July from 7.2% in June.
That changed the theme a bit as it was the best annual growth number since February last year. Not only that but it means that the growth rate has been picking up since the beginning of this year. This is the opposite of the mood music of 2019 where we have seen an economic slowing. It suggests that the outlook is not as grim as many now seem to be suggesting. Ironically they were often the same ones who forecast interest-rate increases in the Euro area this year.
There was good news from the broader measure as well.
Annual growth rate of broad monetary aggregate M3 increased to 5.2% in July 2019 from 4.5% in June.
Here too there has been an improving trend.
The annual growth rate of the broad monetary aggregate M3 increased to 5.2% in July 2019 from 4.5% in June, averaging 4.8% in the three months up to July.
We do get a breakdown of this.
The components of M3 showed the following developments. The annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, increased to 7.8% in July from 7.2% in June. The annual growth rate of short-term deposits other than overnight deposits (M2-M1) increased to 0.1% in July from -0.1% in June. The annual growth rate of marketable instruments (M3-M2) was -1.2% in July, compared with -4.7% in June.
It is not surprising that much of the growth came straight from the M1 number but we see that the M2 component grew as well albeit not by much. The wider money supply is still struggling but even it is reducing more slowly. Indeed it turns out that this is really the M1 growth.
Looking at the components’ contributions to the annual growth rate of M3, the narrower aggregate M1 contributed 5.2 percentage points (up from 4.8 percentage points in June), short-term deposits other than overnight deposits (M2-M1) contributed 0.0 percentage point (as in the previous month) and marketable instruments (M3-M2) contributed -0.1 percentage point (up from -0.3 percentage point).
We can look at these numbers another way.
As a reflection of changes in the items on the monetary financial institution (MFI) consolidated balance sheet other than M3 (counterparts of M3), the annual growth rate of M3 in July 2019 can be broken down as follows: credit to the private sector contributed 3.2 percentage points (down from 3.3 percentage points in June), net external assets contributed 2.9 percentage points (up from 2.4 percentage points), credit to general government contributed -0.2 percentage point (down from -0.1 percentage point), longer-term financial liabilities contributed -1.1 percentage points (up from -1.2 percentage points), and the remaining counterparts of M3 contributed 0.3 percentage point (up from 0.0 percentage point).
This type of breakdown can be unreliable ( it went very wrong in the UK in the past) but the amount of growth from abroad worries some.
A change of tack
Vice President de Guidos spoke yesterday and perhaps tried to calm expectations down.
The echo chamber effect and the inherent noisiness of market signals are reasons why we need to take the expectations that are priced in financial markets with a pinch of salt. This means that we need to also rely on other sources of information to ensure that we conduct a robust monetary policy. The incoming macroeconomic data are one such source. As we keep stressing, our monetary policy is data dependent, not market dependent: indications from market expectations cannot replace our policy judgement.
Although I found this a little disturbing as there is a confession they have not done this before tucked away in it.
At the ECB, we are enhancing our toolkit for the communication with the general public in two ways – both by collecting more information about consumers, and by targeting some of our communication efforts more directly at the general public.
There are two lessons today I think. Firstly the domestic economic outlook in the Euro area is better than many may think. Not great but left to its own devices it would have some growth I think roughly at the rate we have seen so far this year. Also if the trade war calms down and the ECB eases it may end up with pro cyclical monetary policy. Ooops.