Euro area: Still positive signs from bank lending and money supply

The upward trend in M3 money supply continued as it improved to 2.5% y/y in September from 2.1% y/y in August. This is the highest rate of increase since May 2013 after bottoming at 0.8% y/y in April 2014.

M1 money supply also improved, to 6.2% y/y in September from 5.9% y/y in August. Real M1 growth has been a good leading indicator for GDP growth on a nine-month horizon and the upward trend since February suggests that euro activity will pick up again.

Loans to the private sector adjusted for sales and securitisation continued to decline at a slower pace in September. The yearly rate declined 0.6% compared to a decline of 0.9% in August. This confirms that the slower pace of decline in lending to the private sector, which started after the ECB had taken its snapshot of banks’ balances for use in the AQR in December 2013, continues.

The monthly loan flows showed an increase in loans to households of EUR5bn and the annual rate improved slightly to 0.6% from 0.5%. Loans to non-financial corporations declined EUR3bn in September after declining EUR1bn in August. Although it still declines, the pace is lower than during 2013 and the annual rate of change continues to decline at a slower pace.

The ECB’s Asset Quality Review and stress test released yesterday showed less capital shortfall than expected and from a credit growth perspective there will be less headwind from capital shortage going forward. Hence, supply side constraints on credit growth should be limited and it seems that it is up to the demand side to improve credit growth to the real economy. For more about the AQR and stress test see: ECB comprehensive assessment: Capital shortfall less than expected, 27 October.

On Wednesday, the ECB’s Bank Lending Survey for Q4 is due for release. In Q3 it showed that demand for credit and loans is increasing and for consumers it is increasing at the fastest pace since the financial crisis kicked in in 2008. However, there is a risk of some setback in credit demand following the latest weakness in economic data. We continue to see this as temporary and when the recovery strengthens again, the better supply conditions should be supportive for economic activity.

Today’s lending figures also provide additional information about the potential boost to liquidity from the ECB’s TLTROs. Given the observations for net lending in May- September, euro area banks are currently eligible for EUR140bn on the TLTROs from March 2015 to June 2016. Thus, it is higher than last month’s release, where it was EUR87bn. The potential take-up on the first allowance in March 2015 depends on accumulated net lending until January 2015; hence, the liquidity boost is still uncertain (we have five out of nine data points on a national level).