Money and Credit Growth Plunge in EMU and Money Weakness Globally

Money growth in the European Monetary Union continues to contract and the pace of contraction appears to be stabilized. Over 3 months the European Monetary Union M2 measure declines at a 1.8% annual rate; this compares to a decline of 1.9% at an annual rate over 6 months and to a decline of 0.2% over 12 months. The pace of decline has stepped up from 12-months to 6-months and then from 6-months to 3-months it has stabilized.

Credit metrics, however, continue to weaken at a faster pace. Credit to residents falls at a 1.3% annual rate over 3 months, compared to a drop at a 0.3% annual rate over 6 months and an increase at a 1.3% annual rate over 12 months. In comparison, of course, there has been much faster growth over the previous two and three years.

Private credit growth falls at a 1.1% annual rate over 3 months after logging flat performance over 6 months and rising by 1.5% over 12 months; it is more than twice that pace over the previous two- and three- years.

EMU money and credit growth assessments in real terms Money: Reassessing all these growth rates by incorporating inflation and calculating real rates of change that take out the inflation effect, leaves us with money supply growth falling at a 4.5% annual rate over 3 months, slowing from a 5.1% annual rate over 6 months, and that in turn slowed from a 5.4% annual rate over 12 months. These metrics continue the declines in real balances reported over two years and three years. However, over two years and three years, the rate of decline is at a slower pace than it has been recently. On balance, there is a slight slowing in real M2 growth; at this point, it's still only slight backing off and the 3-month growth rate is still -4.5%.

Credit: The profiles for credit growth are more mixed with credit to residents falling at a 4% annual rate over 3 months following a 3.5% annual decline rate over 6 months and falling at a 4.1% annual rate over 12 months. All of these are faster declining growth rates than the declines over two and three years. Private credit shows much the same kind of pattern with a 3.8% annual decline rate over 3 months, a slightly reduced 3.3% decline rate over 6 months but then a stepped-up 3.9% decline rate over 12 months. These compare to lesser rates of decline over the last two and three years.

The bottom line for the European Monetary Union is that money and credit growth is slow or slowing when recast in terms of real balances or real credit. Declines appear to be a little bit flatter and there appears to be some modest deceleration underway. However, in the big picture, we still have money and credit declining and so these are contractionary policy forces that add to the European Central Bank’s rate-hiking way.

Global money growth Globally the year-over-year patterns in the chart show ongoing declines and the growth rate of money that are still widely in force. The U.S. shows the deepest decline in the nominal money stock over 12 months and for the U.S. this rate of decline appears to be bottoming as there is a small upturn at the bottom of the series indicating a slightly less negative growth rate. For the European Monetary Union and for the U.K., year-over-year money growth rates have come close to zero and appear to be hovering there. For Japan, the rate of growth has decelerated and there still may be a modest deceleration in force, but for the most part Japan's money supply growth appears to be slowing down and settling into a stable growth range.

The annual growth rate in nominal M2 in the U.S. is -3.6%; that compares to +0.6% in the U.K. and +2.6% in Japan. Over 6 months both the U.S. and the U.K. money growth rates get weaker while for Japan the money growth rate moves up from 2.6% to 2.9%. Over 3 months in the U.S. case the negative growth rates for nominal money growth lessen, while in Japan the growth in money accelerates logging a positive annualized 3-month growth rate of 3.4%. For Europe and the U.K., patterns are more complex.

Global real money balances Turning to the growth of real balances, U.S. real money supply growth deflated by the CPI shows a changing pace of contraction from -6.5% over 12 months to a stepped-up pace of decline -7.4% over 6 months to a reduced contracting pace of -2.4% over 3 months. In the U.K., the 12-month growth rate is -7.2%; that deepens to -10.8% over 6 months and then lessens to -8.2% at an annual rate over 3 months. In the U.K. profile, the 3-month growth rate is still weaker than the year-over-year growth rate. For Japan, 12-month growth in real balances is -0.6%; it steps up to +0.7% at an annual rate over 6 months and then recedes to a pace of -0.1% over 3 months. For Japan, the growth rates from two years and less are all within the growth range of +1% to -1%, a very narrow range, a very stable performance for money growth in real terms.

Summing up Inflation continues to overshoot; central banks are addressing the issue, reducing money growth and hiking interest rates. It is unclear whether these actions are going to be enough or too much...and the debate is on. Money supply charts offer a chilling view of policy with broad decelerations in money growth in force. But, of course, these declines/decelerations follow previous great spurts in money growth. But interest rate levels deflated by inflation, quite the opposite, do not look like they are up high enough in terms of historic norms. The debate is on...