Latest Eurozone monetary developments showed that lending to businesses and households remained weak in June. In a context where the ECB looks on track to tighten further its monetary policy 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. 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 0.6% in June 2023 from 1.0% in May, averaging 1.0% in the three months up to June. In the meantime, the annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, was -8.0% in June, compared with -7.0% in May. Taking into consideration inflation, real M1 — usually a leading indicator of GDP — declined by 13.5% YoY in June, pointing to a gloomy outlook for the coming months.
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 2.0% in June from 2.8% in May. Among the borrowing sectors, the annual growth rate of adjusted loans to households decreased to 1.7% in June from 2.1% in May, while the annual growth rate of adjusted loans to non-financial corporations decreased to 3.0% in June from 4.0% in May.
Looking at most recent figures (6-month annualized), the trend is even worse with credit to the private sector still flirting with 0% (although improving a bit in June). Without surprise, lending for house purchase (households) kept contracting, partly explaining home prices’ decline in several countries including Germany.
Source: ECB data
The key problem is that monetary developments in the Eurozone are unlikely to improve in the short term with ECB on track to raise rates and tighten further its balance sheet. It came as Eurozone demand for loans among firms has plummeted to an unprecedented low. According to a recent 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.
*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 outlook is likely to deteriorate further. It also means that Bloomberg consensus of economists looks optimistic concerning Eurozone GDP forecasts for both 2023 (+0.5%e) and 2024 (+1.0%).
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.
