Money and Credit Trends in EMU and Globally Remain Weak But Stir

In July, global money supplies and credit demands continued to be weak or to decline- for the most part. However, on the oil front, prices rebounded strongly after a step back in June. The impulse to prices coming from money supplies is very weak despite this reversal.

Euro area trends In the euro area, money supply (M2) is falling 1.5% at an annual rate in July and credit measures are growing at less than 1/2 percent at an annual rate. Over three months money and credit growth in the European Monetary Union are declining. Over six months money and credit measures are declining, and over 12 months money is declining with credit measures up by barely 1% year-on-year. However, sequentially, the progress of growth rates to continually lower level has been truncated over three months compared to six months but not by much since we're still seeing declining growth rates, they're just smaller declines than over six months.

Turning to real balances in the monetary union, the growth of money and credit is negative over three months, six months, twelve months, two years, and three years - on all those horizons for all three measures. The decline in the demand for inflation-adjusted credit rolls on and real money balances continue to contract. For the most part, the peak negative growth rates are over twelve months with M2 money supply in the monetary union falling at a 6.2% annual rate, logging a -6.1% annual rate decline over six months and then a 4.9% annual rate drop over three months. That's a slight diminishing of downward pressure but the emphasis is on slight. Credit to residents falls by 4.3% over twelve months, slips at a 3.9% annual rate over six months and falls at a 2.9% annual rate over three months. Similarly, private credit falls at a 4.1% annual rate over twelve months, falls at a 3.8% annual rate over six months, and falls at a 2.9% annual rate over three months; these are all substantial negative growth rates, but there's evidence across all three measures of slightly diminishing downward pressures.

Money growth globally More broadly, when we look at money supply growth across the international scene in the main money center countries, we see a smattering of positive growth rates in the U.S., the U.K., and Japan for monthly changes in June and July. The U.K. figures are lagged by one month; there the June figures are substituting for July figures since July data are not out for the U.K. Over three months, six months, and twelve months, we see the same phenomenon for the U.S. as in the monetary union as U.S. growth rates begin to turn around, with a 3.7% annual rate decline over twelve months, a 3% annual rate decline over six months and a growth rate of 3.7% that is positive over three months. The U.K. pattern is a bit more convoluted with twelve-month growth at minus 0.2% over 12 months, slipping faster at a 1.1% annual rate over six months and logging positive growth at less than a one-half of one percent annual rate over three months. Japan’s nominal money supply growth numbers are positive on all horizons and for the most part fairly steady, logging 2.4% growth over twelve months, a 2.8% pace over six months and a 2.4% pace over three months.

Real balances- The growth rate of real money balances produces a preponderance of negative growth rates for the U.S., the U.K. and Japan. But as we saw with the trends in the EMU, the progressive trends to ever weaker numbers are being broken. U.S. real annualized M2 growth is -6.8% over twelve months, -5.4% over six months and then at plus 1.8% over three months. The UK logs and decline of 7.6% over twelve months, the annual rate decline steps up to -7.9% over six months and then falls back to -4.6% over three months. Japan’s (M2 plus CDs) real balances fall at an annual rate of 0.8% over twelve months, grow at a pace of 0.9% over six months and then fall at a 0.3% annual rate over three months. The patterns technically are somewhat convoluted but stepping back from a technical numerical view of things. Broadly speaking, in Japan the growth rates have flattened out, while in the U.K. and the U.S. the trend to ever weaker numbers has stopped and there's some evidence of nominal money growth trying to regain positive footing (or of money reducing its declining pace in real terms).

Japan- an exception The broad view of money growth looking at annual rates still finds a great deal of weakness. Monetary decline or very tepid growth is the rule. Japan is the only exception to this where its twelve-month growth rate is only slightly weaker than its two-year growth rate and its growth rates for three-months and six-months are like their twelve-month growth rates. Japan shows a great deal of stability even though it's been showing a little bit more of an inflation flare recently.

Oil-still a factor for inflation Oil prices continue to provide some negative thrust and still have a clear pattern as oil prices are up about 25% over twelve months, then fall at a shallower 7.7% annual rate over six months, but since have stepped up the pace to fall on almost a 20% annual rate over three months. As I mentioned at the outset, oil prices fell slightly in June; they rebounded more strongly in July.

Central banks are still tightening and ‘behind the curve’ Central banks are facing excessive inflation across the board; however, the inflation rates have been diminishing with substantial declines posted in the United States, in the European Monetary Union and with the U.K. showing some decline in inflation as well. In Japan, inflation is off peak but doesn't show the same tendency to downtrend as in any other locations although Japanese inflation is also lower and it never peaked as high as it did in the other countries; Japan’s peak inflation was barely over 4% while inflation in the U.S., the U.K. and the EMU peaked between 9% to 10.5%. These are significantly different experiences across central banks. The changes in year-over-year inflation rates show the biggest decline in the U.S. followed by the EMU, followed by the U.K. Japan actually is posting a slight increase in its year-over-year pace in the neighborhood of one-half of one percentage point.

Summing up The money growth figures suggest that the worst of the liquidity contraction is behind us - unless a new episode begins. This is even though the Federal Reserve continues to shrink its balance sheet and interest rates continue to rise globally. In the face of tighter monetary policy, the contraction of liquidity is giving up some ground- at least for now. These are going to be trends to watch because rising interest rates generally are not associated with stronger money growth (or money growth that is less weak). All this emphasizes is that the global economy is still coming out of an unusual period. We are in the wake of the Covid recession, and in the wake of a severe contraction caused by policy reactions to control the Covid outbreak and to what were excessive monetary responses globally. Other global repercussions including altering supply chains are a knock-on effect that is still in the process of adjustment. Globally, labor markets have been rocked as labor has reset priorities in the wake of the Covid threat. The process of putting the toothpaste back in the tube can be almost as messy as the process of letting it out.