Euro area: Further signs of stronger recovery

Euro area M3 money supply strengthened further in January, rising 4.1% y/y after increasing 3.6% y/y in December. The rate of increase was the fastest since April 2009 and it is now close to the ECB’s old reference rate of 4.5%.

Growth in M1 money supply was also higher at 9.0% y/y in January, up from 7.9% in December. In real terms, M1 money supply is a good leading indicator for economic activity and it suggests GDP growth of around 0.7% q/q at the beginning of H2.

Loans to the private sector increased 0.5% y/y in January after turning positive in December. The positive print in December was the first since mid-2012. (Note the figure is adjusted for sales and securitisation.)

The increase in loans to the private sector reflects higher loan growth to households (+0.9% in January from +0.8% in December) and less negative loan growth to nonfinancial corporations (-0.9% in January from -1.1% in December).

However, there was a decline in the monthly loan flow to non-financial corporations of EUR4bn after it increased EUR10bn in December. The figure can be volatile, thus in our view it is more relevant to look at the trend, which is still positive.

The progress in lending from banks reflects that on the supply side, the ECB has finished its stress tests and asset quality review, implying banks can focus on lending to the private sector. Added to this, the ECB’s QE programme should lead to cheaper and more accessible credit. On the demand side, private consumption in particular is strengthening, and banks have also reported that demand for loans from enterprises is increasing.

The credit impulse, which is important for higher GDP growth, signals GDP is increasing much faster. In yearly terms it points to growth above 2%. Overall, the increase in loans to the private sector supports our view of higher growth in the euro area. We expect GDP growth of 1.5% in 2015, which is above consensus of 1.2%.

Today’s figure also provided the latest information about the potential boost to liquidity from the ECB’s upcoming TLTRO auction in March. Banks should be eligible for EUR292bn at the auction. The auctions are less interesting now that the ECB has announced its QE programme, but as the asset purchases have not started yet, it will be important to watch the March TLTRO auction for how it affects excess liquidity in the short term. We expect a take-up of around EUR50bn.