Euro Area Credit Contraction

Euro area credit contraction rings alarm bell at ECB

• Euro area M3 growth declined from 2.1% in September to just 1.4% in October – well below consensus expectations of 1.7%. The continued decline in M3 growth should ring an alarm bell at the ECB.
• M1 growth has declined for five consecutive months now but showed some signs of stabilisation as it only posted a modest decline from 6.7% to 6.6%. M1 growth at this level suggests that GDP growth in the euro area should be around 0.3% q/q on a six month horizon, which is broadly in line with our expectations (although a bit on the low side). Five months ago M1 growth signalled that growth could reach almost twice that. If we look at real M1 growth instead, the weakening of this growth signal appears less alarming.
• Loans to the private sector continue to decline and adjusted for sales and securitisations the pace of decline increased slightly again (from -1.6% in September to -1.7% in October). We prefer to look at the monthly loan flows to better detect turning points. The monthly loan flows showed signs of improvement for a couple of months, but today’s data unfortunately suggests a renewed small deterioration in both loans to households and loans to enterprises. In particular, credit for consumption declined while loans for house purchase improved further. Loans to enterprises continue to decline – at a slightly increased pace.

 My view:

Despite all the central bank and government tinkering in Europe over the past 5 years, the growth of credit remains poor.  This is hardly the sort of development one would expect from a growing or robust economy that just came out of recession.

We suspect that the deleveraging process was not allowed to fully unwind during the 2008/09 credit crunch, thanks to central banks "rescuing" the economy.

Bad decisions were made, bad decisions still need to be unwound so that good decisions can be made in their place.  It appears that the world improvers are determined to keep the bad decision makers in business at taxpayer expense.  That is all well and good, but the bond market will be the final arbitrator of this mess.  So expect higher bond yields across the board until some reality returns to the Euro area version of Fantasy Island.