Janus Henderson: Euroland money numbers better but trends cooling

Non-financial M1 – the monetary measure with the strongest historical forecasting record, according to ECB research – rose by 1.0% in August, following no change in July. The broader non-financial M3 measure was up by 0.6%, having fallen 0.1% in July*

Six-month growth of non-financial M1 moved back up to 3.8% (7.7% annualised) – solid by historical standards but well down from a March peak of 5.6% (11.5% annualised). Non-financial M3 growth has also cooled since then. Bank lending expansion has been stable but is a coincident / lagging indicator of the economy (confirmed by the ECB research) – see first chart.

The monetary slowdown has been mild in real (inflation-adjusted) terms because of a simultaneous decline in the rate of increase of consumer prices (seasonally adjusted) over the spring and summer. Real  money growth, however, has pulled back sufficiently to suggest a slowing of economic momentum in late 2017 / early 2018 – second chart. Six-month inflation, moreover, is likely to rebound, so real money trends may weaken further.

Robust GDP growth of 1.2% or 2.4% annualised during the first half of 2017 partly reflected strong net exports, which may face headwinds from a 7.2% rise in the euro effective exchange rate between December and August. Domestic demand rose by 0.6% or 1.3% annualised in the first half – third chart.

Real narrow money trends were much stronger in Euroland than the US in late 2016, suggesting superior economic prospects. GDP expanded by an annualised 2.4% in Euroland between the third quarter of 2016 and second quarter of 2017 versus 2.0% in the US. With US real non-financial M1 growth now back above the Euroland level, the US economy is likely to outperform in late 2017 / early 2018.

* Non-financial = held by households and non-financial corporations.