Latest Eurozone monetary developments showed that lending to businesses and households remained weak in September. In a context where the ECB is on track to maintain rates “high for longer”, tighten further its balance sheet and the full effects of previous moves are yet to be realized in the broader economy, the economic outlook is likely to deteriorate in the coming months, reinforcing fears 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 stood at -1.2% in September 2023, after -1.3% in August, averaging -1.0% in the three months up to September“. In addition, “The annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, was -9.9% in September, compared with -10.4% in August“. Taking into consideration inflation, real M1 declined by 14.7% YoY in Q3 pointing to a gloomy outlook for the coming months. As ECB’s Schnabel noted “developments in real M1 growth have typically been more informative about future turning points in real GDP growth than about the depth of the downturn.”
Meanwhile, data also revealed “the annual growth rate of credit to the private sector decreased to 0.2% in September from 0.6% in August“. “Among the borrowing sectors, the annual growth rate of adjusted loans to households decreased to 0.8% in September from 1.0% in August, while the annual growth rate of adjusted loans to non-financial corporations decreased to 0.2% in September from 0.7% in August.“
Looking at most recent figures (6-month annualized), lending for house purchase (households) kept dropping (fastest pace since October 2014), partly explaining weak construction activity in several countries including Germany.
The key problem is that monetary developments in the Eurozone are unlikely to improve dramatically in the short term with the ECB on track to maintain rates “high for longer” and tighten further its balance sheet. It came as the full effects of previous moves are yet to be realized in the broader economy. In this context, several indicators suggest economic activity is already under pressure with Eurozone PMI composite contracting for a fifth straight month in October.
Also of note, France, one of the most resilient economy in the Eurozone, recently experienced a notable decrease in its demand for diesel, indicating increased strain on the European Union’s second-largest economy. Industry data reveals that, in September, road diesel sales in the country declined by 13% compared to the same period last year, which is a significantly larger drop than observed in recent months.
In addition, yesterday, the ECB reported that in the third quarter, banks in the euro zone further toughened their credit standards, attributing this to increasing interest rates and a deteriorating economic situation. The ECB highlighted that there has been a significant overall increase in the tightening of credit standards since 2022, aligning with the notable decline in lending activity. As a matter of fact, demand for credit from both businesses and households continued to decrease markedly. Despite being somewhat less pronounced compared to earlier periods, this drop still surpassed the expectations of banks, as per the survey.
*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 dramatically in a context where the 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, reinforcing fears 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.