Money Growth Weakness Begins to Abate in EMU As Well As Globally

Money and Credit in EMU- Money growth rates in the European Monetary Union are starting to show clear acceleration although the move higher is moderate. M2 growth in the Monetary Union shows a decline of 1.2% over 12 months, an increase of 0.3% at an annual rate over six months, and a 1.2% annual rate increase over three months-- a clear moderate accelerating pattern. Credit to residents in the Monetary Union continues to waffle as it declines over 12 months and three months but manages an uptick over six months; private credit shows the same pattern.

Real balances in EMU- Real money balances that reflect money supply indexed for the effects of inflation also shows a tendency to move higher although it is still contracting on all horizons. Real money growth declines at a 3.9% annual rate over 12 months, declines at a 1.9% annual rate over six months, and declines at a 1% annual rate over three months. Real credit to residents in real terms shows no clear pattern but declines on the order of 2% to 3% over three months to 12 months. The same is true for real private credit.

Global money trends- Real money balances in the Monetary Union have been declining over the last three years, the same pattern is pretty much true for the U.S., the U.K., Japan, and the other major monetary center countries. U.S. and U.K. monetary growth are calculated through December rather than January because they are not yet updated. For both the U.S. and the U.K., real balances do not decline over the most recent three-month period. U.K. real balances are flat; U.S. balances increased at a 0.2% annual rate, a very small rate of increase. Only Japan, among the major monetary center countries, shows flirtation with growth in real balances even over the three years. Over three years Japan real balances grow by 0.6%; over two years they fall by 0.6%; over 12 months they rise by 0.2%; over six months they fall a 0.5% annual rate; over three months real Japan money balances are growing at a 1.7% annual rate.

Money center country inflation- Inflation rates and these key money center countries continue to show declines. Declines in inflation occurred after peaking in 2022. Inflation in the U.S. peaked the earliest while inflation in Japan peaked the latest. Inflation peaked at the highest rate in the euro area and at the lowest rate in Japan. The evidence now shows U.S. inflation around mid-2023 slowed sharply its tendency to drop flattened out considerably. In the European Monetary Union, there's also some more recent tendency for the inflation drop to lose steam and to for inflation to move sideways; this tendency is present in the United Kingdom as well. Only in Japan is inflation continuing to move lower. But Japan's pattern is different from the other countries because while Japan's inflation peaked between 2022 and 2023 after falling from its peak it flatlined until late-2023 (while inflation rates fell elsewhere) and then resumed a declining pattern which it continues to have today. Japan's inflation is the lowest in the group but not by a lot; inflation in the U.K. is the highest and currently over 4%.

The Policy Game Ahead- Going forward policy is going to depend upon what happens to these inflation rates. Only in Japan are inflation rates now tolerably close to the central bank's target. Before the COVID episode, Japan had a problem of chronically undershooting its inflation target. Japan has special problems related to not only its high debt load that makes it hard for Japan to use fiscal policy for stimulus but more importantly because of its demographics and its declining population. The declining population makes it hard for the economy to generate a firm growth rate and that in turn makes it hard to get pressure on inflation and hard for Japan to hit its 2% target. Japan is the only country in this group that is hoping to keep its inflation somewhere around its current range while other countries are hoping to continue to reduce their inflation rates and hoping to sustain the progress they have made in lowering inflation.

Challenges- Challenges remain for the global economy, especially now that there are more signs of economic weakness. The U.K. is in recession. Germany is slipping into recession, and there's a lot of weakness in Europe. Economic weakness is going to help the central banks to keep inflation moving lower; however, if economies weaken enough, there could be renewed pressure on central banks to reduce interest rates again, and they are certainly going to be careful about doing that after having had this recent experience with inflation – that continues to linger. Geopolitical risks also linger and, in many ways, have worsened. The challenges have gotten greater with the new events in the Middle East and with the election cycle in the United States fomenting political differences that the administration is having a tough time dealing with. Domestic policy issues in United States have spilled out into the global arena in a way that will make life more difficult for Europe as President Biden has cut off LNG exports. There's also are policy differences with Republicans that have for the time being shut down new funds provided to Ukraine. And the economic risks remain and, in many ways, get worse, because of the election cycle as well. While money growth rates show signs of picking back up to a more normal pace after this period of protracted weakness- the weakness followed a period of excessive credit creation, money growth, fiscal expansion, and the triggering of supply chain problems. The transition back toward normalcy is on. Still, it's not clear whether there will be a recession interposed in the cycle before true price stability is reached amid all the other policy challenges.