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Economy in Brief

Money and Credit Growth Fade in EMU; Global Money Growth and Economic Growth Slow
by Robert Brusca  July 27, 2021

EMU money supply growth (M2) has slipped and has been decelerating for at least a year. Much of that traces back to the extraordinary stimulus taken up as the virus swept globally in early-2020. But the use of six-month and three-month growth rates for evaluation changes the base for subsequent calculations underscoring that the shorter period growth rates are authentically slower not just the result of a base effect.

EMU money growth over three months and six months is weaker than its pace over three years, two years and 12 months. Credit to residents and private credit also is slowing and has many of the same characteristics of slowing money growth. The slowdown is broad.

Globally money has slowed too as the chart (on the right) illustrates. The U.K. and Japan have seen slowing in money growth that parallels the slowing seen in the EMU. In the U.S., however, the slowing appears more technical for now. Even three-month growth in the U.S. is stronger than average growth over three years; over six months growth is much the same and is barely slowing compared to the growth of the past two years. While the chart chronicles a sharp ramp up and slowdown of U.S. money growth, the current three-month growth rate is still strong in historic perspective and much stronger relative to history than for other monetary center countries and regions in general.

Since inflation has flared, the data on real balances actually contain some novel trends. For the EMU, the monetary slowing appears a bit more severe when we look at real balances. For credit to residents, we see the first big difference as real credit to residents is contracting over three months and six months. Inflation has risen enough to begin a credit crunch at a time that Christine Lagarde still wants policy to remain accommodative. There is a similar sharp slowing and credit contraction for private credit. Credit contraction suggests that ECB policy may be tighter than they want it to be.

In the U.S. where inflation has jumped, real M2 shows a more significant slowing that brings the three-month pace down below the three-year average and all other averages. However, the slowing is still new and six-month growth is still higher than the three-year average but does slow relative to 12-months and two-years. U.K. real balance growth slows sharply to a barebones 0.1%. That is a very slow pace and a slowing compared to all other horizons and there is a slowing over six months to go with it. Japan’s real balance growth rates slow steadily from two-years to 12-months to six-months to three-months. But Japan still posts a solid 1.8% rate of growth over three months for real monetary balances.

Oil prices have been slowing with a peak pace over six months. Both real and nominal oil prices are rising more slowly over three months than over 12 months but still are stronger than for the longer averages.

Table Broad Inflation and Growth Trends (below) brings news on inflation, changes in inflation, IP growth and the change in composite PMI data to the fore. Here we can see what growth and inflation are doing side by side. To facilitate an updated real oil price figure, I penciled in a 0.3% gain for the US PCE in June so that the US PCE inflation rate is at least partly estimated.

All inflation rates have accelerated since March of last year with the exception of Japan’s. All inflation rates (CPIs all except for the use of the PCE in the U.S.; the PCE is the gauge that the Fed targets). Inflation in the U.S. has accelerated by 2.8 percentage points as of June compared to 1.6% in the EMU and in the U.K. and to 0.1% in Japan. Inflation acceleration shows some hints of peaking in May (in terms of the change in the year-on-year pace), but it is too soon to have any confidence in that.

The growth side of the ledger shows 12-month changes in composite PMI values exhibiting their peaks in April- not surprising given the base effects in operation. And most show a sharp deceleration in the change in composite PMIs in June compared May as a year ago a strong recovery was lifting conditions depending on the sector.

Industrial production (excluding construction) in February 2020, just ahead of the virus striking, was actually contracting year-over-year. So the virus hit manufacturing in a moment of weakness. The virus added its negative effects. After some less than synchronous behavior, by March 2021 IP everywhere was growing again. Growth rates have since peaked in April 2021 (except for Japan). This owes to the fact that growth rates in April and May of 2020 were generally at their weakest. The U.S. is the lone observation for June and its slowdown in June from May is sharp. Is that a worry?

Summing up
There are several trends we need to sort out to make sense of the data above. One issue is that the virus socked the economies then recoveries kicked in aided by stimulus and growth became strong. These events cause growth rates to be weak then to become very strong and then to fade. So the current fading in growth may just be part of a normalization process. However, the composite PMI slowing in the U.S. seems outsized compared to elsewhere. The U.S. has introduced the most stimulus. U.S. inflation acceleration even on the PCE measure (which is lower than the CPI) is ahead of every other country. Is that related to its sizeable stimulus? Then there is the question of what inflation is doing to ‘real’ variables. We see faster monetary slowing when we look at real monetary balances. In the EMU, real credit flows are contracting and that seems like an undesired event. Is inflation distorting our view of what policy is doing? Central bankers all talk as though the blow up in inflation is temporary. Should that be the focus? What about its current impact on real variables? Does that matter? Still, inflation is uncomfortably high and even official forecasts seem to see it staying that way ‘for some time.’ How much time in the discomfort zone is too much time for ‘high’ inflation? Inflation expectations already are bumping up, but central bankers continue to say that they regard expectations as consistent with their objectives. Is this true or it just what must be said even if it is said with crossed fingers?

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