Money and Credit Growth Are Stuck in a Transition Phase

Money growth still contracting; credit growth is flat EMU Money Growth- Money and credit growth in the European Monetary System has ground to a halt with M2 money supply still decelerating in nominal terms. Three-year growth is at 2.6% at an annual rate, two-year growth at a 0.5% annual rate, and growth over three months is flat. When viewed in real terms, there's a little more progress that appears but the growth rates for real money supply are negative. Over three years European Monetary Union money grows at a rate of -2.7%; over two years it is weaker at a -3.8% annual rate; over 12 months real money supply declines at a 2.5% annual rate. Over three months, real money supply has declined at a 1.3% annual rate, reversing the step-down in contraction. There's a gradual and somewhat uneven movement toward money growth contraction to be less restrictive; however, negative real money growth rates persist and when it comes to nominal money growth the performance is simply flat.

EMU Credit Growth- Credit growth in the monetary union faces similar trends. Private credit grows at 2.7% at an annual rate over three years, at a 1.9% annual rate over two years, but private credit growth over three months has only a 0.2% annual rate of growth. Nominal private credit growth has slowed its pace so much that over three months its pace has been close to zero. Looking at private credit growth in real terms, we see it shrinks at a 2.7% annual rate over three years; it shrinks at a 2.5% annual rate over two years, that's further reduced to a -2% annual rate over 12 months. Over three months, the annual rate for credit growth is further reduced to -1.1%. The degree of contraction for credit in the European Monetary Union has been reduced; however, the EMU continues to demonstrate weak nominal credit growth and declining inflation adjusted credit growth.

Global money center monetary conditions Japan makes its own way- Globally, Japan stands alone among major monetary centers, in terms of nominal money growth. Japan's money growth in nominal terms has been extremely steady at a 2.8% annual rate over three years, at a 2.5% annual rate over two years, and at a 2.5% annual rate over one year. Over three months, money growth in has ticked up to 3.2% at an annualized rate. These are extremely stable nominal growth rates. The chart clearly demonstrates Japan’s relative stability comparing only year-on-year rates. In real terms, Japan's money growth shows mixed patterns with growth of 0.5% over three years, which weakens and shows declines over two years and over one year. Those declines in real money growth transition to a 0.5% annual rate over six months and a 2.1% annual rate of real growth over the last three months, as real balance growth accelerates.

U.S. and U.K. trends; commonalities and differences- U.S. and U.K. nominal money growth rates show a swale pattern with nominal growth rates over three years strong, giving way to declines (or weakness) in nominal money growth over two years and 12 months and then swinging up toward expansion and rising in the most recent three months. U.S. nominal money growth, for example, declines by 0.3% over 12 months and gains at a 1.3% annual rate over six months and at a 1.7% annual rate over three months. In the U.K., over 12 months M4 declines at a 2% pace; it trims that to an annualized rate of decline at a -0.2% pace over six months and then it grows at a 4% annual rate over three months. Real money balance growth in the U.K. and in the US shows ongoing contraction with the increase in money supply not sufficient to compensate for the increase in inflation that has been experienced. Over three years U.S. and U.K. money growth rates have a 3% ‘handle,’ over two years the ‘handle’ grows to 6%. Then U.S. and U.K. trends diverge. Over 3 months, real M2 declines in the U.S. to a -2.8% pace while U.K. real M4 growth declines at a -0.9% annual rate. How each country gets there in terms of growth rates differs. Short-term trends are mixed globally.

Money balances are not promoting growth- As a result of these patterns, it's not possible to make a particular overarching statement about money supplies except the money supply is not particularly stimulative right now. Japan is a partial exception to this statement but looking at the U.S., the U.K., and the European Monetary Union, we see weak-to-declining nominal money supply growth and we see declining real balances for money supply. The growth rates all show contraction, but the pace of contraction is mixed. The bottom line is that money growth isn't stimulative. It isn’t helping to promote growth in these developed money-center economies. Meanwhile, all eyes and ears are glued to clues on interest rate prospects.

The transition fails to transition- Central banks have generated these results while looking to transition from their tightening modes to an easing mode. This process was led by the rhetoric in the U.S. where three rate cuts at one point were queued up for this year and were relatively widely anticipated by the public statements and projections of Federal Open Market Committee members and by the markets. However, with the turnabout in short-term U.S. inflation trends, the outlook for rate cuts has been reduced – for some it has been eliminated. The Federal Reserve is talking about not having seen enough inflation progress. In the European Monetary Union, there are still expectations of a rate reduction by mid-year but, of course, that's going to depend on what happens on the inflation front, which has become somewhat touch-and-go. Japan is looking to hike interest rates. Inflation there remains higher than its target, but it hasn't accelerated as much as the Bank of Japan and market participants thought that it might. This could put the outlook for Japanese monetary policy in a state of uncertainty. It has also helped to muddy the waters in forex markets where Japan rates hikes, and a series of U.S. rate cuts had been expected to drive market trends and now all that is in a state of flux.

Growth and inflation trends are mixed- Inflation rates and the money center countries have uniformly been reduced when comparing year-over-year rates of change. However, over the last six months, inflation rates on a national or regional level have flattened out or annual rates of inflation have begun to show less decline than they did previously. Meanwhile, growth trends judged from industrial production show ongoing strong declines in Japan, declines in the EMU while the U.S. and the U.K. feature industrial vacillation.

A muddy picture- The global picture right now can only be considered muddy. Currently growth is mostly low, poor and in some places, showing contraction. However, central banks have reduced inflation, which is no longer accelerating in major way, but it may not be making the kind of progress central bankers would prefer to stay on a rate-cut path. Inflation is over target generally and central bankers are on the fence about how much longer they need to hold rates at elevated levels to make the inflation progress they desire. Still, no Western money center central banks have rate hikes as their base case. There are still some things Western central bankers can agree on.