Euro area: Loans to households slowly increasing

Euro area M3 growth declined to 2.1% y/y in September down from 2.3% in August and was weaker than consensus expectations (2.4%). M1 growth also declined to 6.6% y/y in September from 6.8%.

M1 growth is a good leading indicator for GDP on a six month horizon and the decline over the last five month is a bit concerning. Nevertheless, M1 growth still points to GDP growth around 0.3% q/q in the beginning of 2014.

Loans to the private sector were down 1.9% y/y in September, but the decline was less than in August, when it decreased 2.0% y/y. In order to detect a turning point in lending it is more interesting to look at the monthly loan flows. Here there are tentative sign of stabilization.

Loans to households increased for the second month and even though the increases are small, it is positive that loans to households are not decreasing and that previous months declines have now been reversed.

Loans to non-financial corporations are still declining albeit at a slightly slowing pace. The decline in loans to non-financial corporations is driven not only by Spain, but also visible in e.g. German data.

The decline in loans to private sector for more than a year indicates that easy monetary policy is still not feeding through to credit growth. A continued credit contraction is one of the key risks to the euro area recovery. However, it is not unusual that credit lags behind the business cycle.

Currently the forthcoming Asset Quality Review may be an obstacle for the ECB’s easy monetary stance. We expect banks to focus less on their balance sheets and start to lend more money in 2014, when data for the review have been collected.