Euro area money supply growth slows down, but economists say data misleading

The rate of growth in the euro area's money supply picked-up at the end of 2018, but some economists said that strength in the headline number was misleading.

According to the European Central Bank, money supply measured by the M3 aggregate grew at an annual pace of 4.1% in December, versus 3.7% in November (consensus: 3.8%).

But that was solely in response to improved readings on the rate of decline in short-term deposits and marketable instruments, Claus Vistesen, Pantheon Macroeconomics's chief Eurozone economist pointed out.

The rate of growth in so-called 'narrow' money supply meanwhile, which correlates well with short-term GDP growth, dipped by one tenth of a percentage point to 6.6%.

"The recent sharp slowdown in GDP growth means that the trend is now undershooting the pace implied by real narrow money, but the overall message is clear. EZ growth is slowing," Vistesen said.

Nevertheless, the same economist added that: "The chart shows that the trend in real M1—seasonally adjusted by PM—is firmly falling, but it is not collapsing at the same rate as it did in 2007/08 and 2011, when the economy suffered a recession.

"Indeed, given the recent slowdown, the risk-reward ratio favours a small increase in the quarter-on-quarter run rate of GDP growth in coming quarters."