E Economics

Eurozone Monetary Developments In August Raise Fears of A Recession

27 September, 2023
Monetary-Developments-in-the-Eurozone-Credit-Private-Sector

Latest Eurozone monetary developments showed that lending to businesses and households weakened again in August. In a context where the ECB on track to maintain rates “high for longer”, tighten further its balance sheet and the full effects of previous moves are yet to be realized in the broader economy, the economic outlook is likely to deteriorate in the coming months, raising fears of a recession.

According to the ECB, “The annual growth rate of the broad monetary aggregate M3 was -1.3% in August 2023, compared with -0.4% in July, averaging -0.4% in the three months up to August. The components of M3 showed the following developments. The annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, was -10.4% in August, compared with -9.2% in July“. Taking into consideration inflation, real M1 declined by 15.6% YoY in August, pointing to a gloomy outlook for the coming months. As ECB’s Schnabel noted “developments in real M1 growth have typically been more informative about future turning points in real GDP growth than about the depth of the downturn.” 

*Using data for July and August as a proxy for Q3.

However, in the meantime, data also revealed “The annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitisation and notional cash pooling) decreased to 0.6% in August from 1.6% in July. Among the borrowing sectors, the annual growth rate of adjusted loans to households decreased to 1.0% in August from 1.3% in July, while the annual growth rate of adjusted loans to non-financial corporations decreased to 0.6% in August from 2.2% in July.

Looking at most recent figures (6-month annualized), the trend is even worse with credit to the private sector stagnating (weakest since March 2023). Without surprise, lending for house purchase (households) kept dropping, partly explaining home prices’ decline in several countries including Germany.

The key problem is that monetary developments in the Eurozone are unlikely to improve in the short term with ECB on track to maintain rates “high for longer” and tighten further its balance sheet. It came as the full effects of previous moves are yet to be realized in the broader economy. In this context, several indicators suggest economic activity is already under pressure with Eurozone PMI composite contracting for a fourth straight month in September.

*Bottom line: Latest monetary developments in the Eurozone already point to a gloomy outlook for the coming months, particularly for the housing sector. Conditions are unlikely to improve soon in a context where ECB is likely to tighten further its monetary policy and the full effects of previous moves are yet to be realized in the broader economy. As a result, the economic activity is likely to deteriorate further, raising fears of a recession.