Janus Henderson: Surprising Strength

Current trends may be contrasted with 2008 and 2011, when unwise ECB policy tightening resulted in real money contraction and subsequent recessions. The suggestion is that economic momentum will stabilise during the first half of 2019 and recover later in the year, barring negative external developments. External risks, however, are high, with possible adverse scenarios including an inventory-led US recession, further Chinese economic weakness, a US / EU trade war and an early no deal Brexit.

Annual growth rates of the headline M1 and M3 measures rose to 6.6% and 4.3% respectively in February, the latter representing an eight-month high. It has been claimed that headline money growth has been artificially inflated by “double-counting” of deposits of certain financial institutions. The basis for this claim is unclear. The focus here is on “non-financial” M1 and M3, excluding deposits of all financial institutions, on the grounds that movements in such deposits are unlikely to provide information about near-term prospects for spending on goods and services. Annual growth of the two measures rose to 7.4% and 4.9% in February, higher than for the headline aggregates – see first chart.

The second chart shows six-month growth rates of the four measures deflated by consumer prices. There has been a significant upswing since mid-2018 in all four cases, suggesting that economic momentum will begin to revive from the second quarter of 2019, allowing for a typical nine-month lead.

Six-month real money growth, admittedly, has been boosted by an energy-driven fall in inflation, which is now starting to reverse. Nominal growth rates, however, have also firmed, particularly for broad money – third chart. The counterparts analysis of M3 indicates that the negative impact of ending QE has been offset by a strengthening "basic" balance of payments position, reflecting a slowdown in portfolio capital outflows. This supports the long-held view here that QE "leaks" abroad and has disappointingly small domestic monetary effects.

Real narrow money growth of both households and non-financial corporations (NFCs) has recovered – fourth chart.

Money trends diverged significantly across the major Euroland economies in the run-up to the 2008-09 and 2011-12 recessions. Italian real money growth is lagging but a similar gap has yet to open up – fifth chart. Italian corporate narrow money, however, is contracting, suggesting further economic weakness – sixth chart.  This negative signal contrasts with solid money trends, both household and corporate, in France and Spain, implying likely economic resilience.