Money Growth

On the face of it money supply growth should not give us much cause to fear recession. The US and UK show slowdowns in high frequency growth rates of money supply but only the US three-month rate is a negative one; and three-month growth rates are often more volatile than indicative. Japan’s pace of money growth is mostly steady at a low rate. Money growth rates do not seem to be a place to find a reason to fear an economic recession either in the US or in Europe.

The Euro area. The Euro area is posting huge growth rates in money and key credit aggregates; those growth rates remain bloated even when deflated by the headline HICP. EMU loan growth slowed over the past year compared to the past three years' average; inflation-adjusted, the slowing is more pronounced from near 12% to 7.5% over the past year and to 2.7% over the last three months annualized. Residential real credit slowed from its three-year pace but has not slowed over two years when its growth has remained too-strong just short of 13%. Inflation-adjusted, there has been a bit more slowing in residential credit but not much. The three-month growth rate in fact tells us that for residential borrowers there has been little retraction in Euro credit at all. The overall pace for loans has slowed from its three-year pace but the two-yea and one-year rates of growth are still steady and high. The three-month nominal pace has slowed to around 8% from near 11% but the real slowing is in the inflation-adjusted figures. There, loan growth is seen down from 11.9% over three years to 5.3% over two years back up to 7.5% over the past year then with a sharper slowing over six months and three months to a low three-month rate of 2.7%. This slowdown in overall credit suggests that there is some slowing in credit outside the residential sector in Europe. Still the 3-month growth rate in credit above the rate of inflation is substantial. It does not seem to be the sort of thing to bring on recession. But the downward shift in the rate of growth in real credit may be indicating a slowing in growth.

The US. In the US nominal money growth slowed over two-year and one-year horizons compared to three years but has seen otherwise quite stable growth rates at around 5.5%. Real balances have slowed much more and are registering negative growth over three months. US real GDP growth has been outstripping what money supply would have allowed in the US with constant money velocity. If velocity fails to expand (velocity is the inverse of the money to GDP ratio) the economy does seem set for a slowing. The recent negative real money growth rate is mild warning, but it is only a three-month figure and so is indicative, not demonstrative. The year/year growth of real balances at 1.7% is appropriate for a period when headline inflation has overshot and oil prices have threatened to extend inflation’s push into the core rate of inflation. ‘Money supply policy’ or at least the result seems broadly in line.

The UK. In the UK money supply nominal and real slowdowns are like those in the US only more severe. The rate of money growth in the UK remains higher than in the US but the deceleration is sharper and may be more of a factor in adversely affecting growth there in the short run.

Japan. Japan’s money growth has been low and steady. After inflation adjustment real money balances are lower but are just skimming above the unchanged level.

Summing up. On balance, Central banks seem to been relatively reserved during this period when oil prices have flared. The ECB makes pointed references to money supply and credit in its policy deliberations and it has been uncomfortable with what it has been seeing for some time. The BoE and BoJ also use monetary references. The Fed makes policy without much reference at all to money supply and has even abolished a monetary aggregate (M3) in recent years. While financial market innovations may have made it harder to measure what economists mean by ‘money’ the monetary definitions offered up by central banks are for the most part growing and do not look to have created much in the way of special growth problems for the recent quarters. Japan continues with low but stable real balance growth and nominal money growth. The UK has the largest deceleration in money growth rates. The US has a three-month shift to a negative real balance growth rate, too short a period to be taken as definitive on illiquidity. The ECB’s aggregates remain above its tolerance levels as does its inflation rate. But the squeeze in Europe, if there is one, is on businesses not on households or the consumer.