Loans to the Private Sector Keep Declining, Money Supply Growth Slows

We want to briefly update the most important credit and monetary data of the euro area, which we last briefly discussed in March (see: “Overview of Recent Monetary Trends”, which focused however more on the US than on Europe).

In spite of the ECB cutting interest rates to the bone and offering new “targeted long term refinancing operations” to banks (see “European Credit Dirigisme” for background information), neither lending to the private sector nor money supply growth have so far picked up in the euro area as a whole (there are of course differences between the individual member nations).

Generally we would regard this as a positive development, insofar as it should help to minimize capital malinvestment. Unfortunately, we can infer from the fact that money supply growth remains in positive territory, that lending to the private sector has been replaced with lending to governments, so the economy continues to be exposed to the burden of deficit spending by governments. This is probably not particularly surprising, but we would be remiss not to mention it.

Below we show three charts, consumer credit, loans to non-financial corporations and the euro area's true money supply (currency plus demand deposits). The red lines show the absolute numbers in millions of euro, the blue lines show the annual rate of change in percent.

Consumer credit has taken a dive, and the slump has recently slightly accelerated again 

Lending to non-financial corporations is still declining, but the pace of the decline continues to slow down. Conceivably, the ECB's TLTROs could boost this type of lending, however, many euro area banks remain in bad shape and putative borrowers are anyway loath to take out more loans – click to enlarge.

Money supply growth in the euro area continues to slow down and its year-on-year rate of change is now at the same level recorded when the technology bubble burst in the year 2000. Interestingly, the euro area's stock markets already look rather wobbly 

Conclusion:

The ECB's most recent ministrations have so far not altered the credit and money supply situation in euro-land. Note that lending to the private sector depends both on the health of the region's banks (which must certainly still be regarded as an issue in euro-land) as well as credit demand (currently non-existent). Since it is a near-certainty that crisis conditions will make a furious comeback should money supply growth rates decline much further (as the briefly interrupted liquidation of malinvested capital would then resume), we should probably expect the ECB to eventually launch some form of “QE”. This will most likely be done under the cover of needing to fight “deflation”, i.e., falling prices of consumer goods (actually, the mere fact that these prices are allegedly “rising too slowly” may suffice as cover for “QE”). Euro area consumers have every reason to hold the people devising such policies in contempt.

Addendum: US QE Abandonment Schedule

Here is a recent chart showing the progression of the Fed's 'QE3', including a projection of when it will end. Once it does end, overpriced “risk assets” will likely be in trouble. Note though that US money supply growth remains at approximately an 8% annualized growth rate (broad money supply TMS-2). This is however less than half the peak growth rate recorded in 2010.

QE3 to date, plus its projected cessation in October 

Charts by ECB, Federal Reserve