Latest Eurozone monetary developments showed that lending to businesses and households weakened in July. In a context where the ECB looks on track to tighten further its monetary policy (at least through the balance sheet contraction) and the full effects of previous moves are yet to be realized in the broader economy, the economic outlook is likely to deteriorate further in the coming months, raising risks of a recession.
*This article was written by Christophe Barraud and was republished with consent.
According to the ECB, “the annual growth rate of the broad monetary aggregate M3 decreased to -0.4% in July 2023 from 0.6% in June, averaging 0.4% in the three months up to July“. In addition, “the annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, was -9.2% in July, compared with -8.0% in June“. Taking into consideration inflation, real M1 — usually a leading indicator of GDP — declined by 14.5% YoY in July, pointing to a gloomy outlook for the coming months.
*Using data for July as a proxy for Q3.
In the meantime, data also revealed “the annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitisation and notional cash pooling) decreased to 1.6% in July from 2.0% in June. Among the borrowing sectors, the annual growth rate of adjusted loans to households decreased to 1.3% in July from 1.7% in June, while the annual growth rate of adjusted loans to non-financial corporations decreased to 2.2% in July from 3.0% in June.“
Looking at most recent figures (6-month annualized), the trend is even worse with credit to the private sector flirting with 0%. Without surprise, lending for house purchase (households) dropped at a faster pace, partly explaining home prices’ decline in several countries including Germany.
The key problem is that monetary developments in the Eurozone are unlikely to improve in the short term with ECB on track to tighten further its balance sheet and potentially raise rates once again before year-end. It came as Eurozone demand for loans among firms has plummeted to an unprecedented low. According to a survey by the European Central Bank (ECB), big banks reported a substantial drop in net demand for loans during the second quarter of 2023, marking the lowest level since the survey’s inception in 2003. In addition, several indicators suggest economic activity is already under pressure with Eurozone PMI composite contracting for a third straight month in August and reaching a 33-month low.
*Bottom line: Latest monetary developments in the Eurozone already point to a gloomy outlook for the coming months, particularly for the housing sector. Conditions are unlikely to improve soon in a context where ECB is likely to tighten further its monetary policy and the full effects of previous moves are yet to be realized in the broader economy. As a result, the economic activity is likely to deteriorate further, raising risks of a recession.
About the Author:
Christophe Barraud is Chief Economist and Strategist at Market Securities. He has been awarded by Bloomberg the title of Top Forecaster of the U.S. Economy (from 2012 to 2020 and in 2022), Eurozone Economy (from 2015 to 2019 and in 2022) and Chinese Economy (from 2017 to 2020). He also won the latest Forecaster of the Year contest organized by MarketWatch in 2020. Since 2021, he has been Adjunct Lecturer at ESCP in the MSc Finance, which has been ranked first worldwide in the 2023 Financial Times Masters in Finance ranking.
