Latest monetary developments in the Eurozone showed that lending to businesses and households deteriorated again in May. In a context where the ECB looks on track to tighten further its monetary policy, the economy is likely to face a longer recession than expected. 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 1.4% in May 2023 from 1.9% in April, averaging 1.9% in the three months up to May. In the meantime, the annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, was down 6.4% in May, compared with -5.2% in April. Taking into consideration inflation, real M1 — usually a leading indicator of GDP — declined by 12.5% YoY, 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 2.8% in May from 3.3% in April. Among the borrowing sectors, the annual growth rate of adjusted loans to households decreased to 2.1% in May from 2.5% in April, while the annual growth rate of adjusted loans to non-financial corporations decreased to 4.0% in May from 4.6% in April.
Looking at most recent figures (6-month moving average annualized), the trend is worrying with credit to the private sector on the verge of contraction. Without surprise, lending for house purchase (households) is already falling, partly explaining home prices’ decline in several areas including Germany.
Meanwhile, there is a risk that several banks reduced lending further in the coming months as deposits’ outflows persisted in May.
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. At this stage, traders expect ECB to raise rates in July and September (probability of 65%). Separately, banks repaid a significant amount of TLTRO on Wednesday while, according to Bloomberg, “Some hawkish European Central Bank officials are pondering options to speed up the reduction of the institution’s €5 trillion ($5.5 trillion) stash of bonds“.
*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. As a result, Eurozone economy is likely to face a longer recession than expected. It also means that consensus of economists looks optimistic concerning Eurozone GDP forecasts for both 2023 (+0.6%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.
