Berenberg Macro Views
Economics
The power of money: real M1 sends a new message
● The power of money: For more than 10 years, real M1 money supply
has been my best long-term leading indicator for Eurozone GDP. In
the region’s largely bank-based system of financial intermediation,
major shifts in real M1 growth have reliably signalled key economic
turning points some three quarters in advance (Chart 1).
Have cash, will spend: The reason why M1 works is simple. M1
adds up cash and overnight bank deposits. It is the money which
companies and households could spend any time they want to. If they
have ample liquid reserves, they will eventually spend some of it.
Return to solid growth: Real M1 turned up decisively in mid-2012. It
heralded the return of the Eurozone to growth in the spring of 2013.
Strong arguments for more growth: The systemic euro crisis is
over, austerity has largely run its course, monetary policy is gaining
traction, Spain and other peripheral countries are starting to reap the
rewards of their reforms, banks will be in a better position to lend
once the stress tests are over this autumn. Growth should pick up as a
result.
But what about money? Real M1 growth has lost some momentum
since the autumn of 2013. It is the only significant economic indicator
so far signalling a downside risk to our forecast that Eurozone growth
will accelerate further to its 1.8% trend rate in late 2014 and 2015.
What does real M1 tell us now? The pace of real M1 growth is not
perfectly correlated with the actual pace of GDP growth three
quarters thereafter. But real M1 signals key turning points. Does the
M1 slowdown now flag a turning point to come?
We cannot dismiss the warning from real M1 easily: But we see
one reason to believe that the modest loss in M1 momentum does not
herald slower GDP growth to come.
Liquidity overhang no longer needed: During and after the
Lehman crisis, real GDP lagged far behind what real M1 would have
suggested (Chart 1). Gripped by fear, households and companies built
up unusual liquidity balances. Chart 2 showing the levels of real M1
and real GDP brings this out clearly. The fear has now faded.
Households and companies no longer need the extra liquidity. As they
reduce the liquidity overhang, M1 growth decelerates. This is good,
not bad, for the growth outlook. It need not herald less GDP growth.
●
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Chart 1: Real M1 growth leads GDP
Key Macro Views reports
Understanding Germany
– a last golden decade
ahead
13 October 2010
Saving the euro: The case
for an ECB yield cap
26 June 2012
Tough love: the true
nature of the euro crisis
20 August 2012
Euro crisis update: the
bare essentials
29 August 2013
Europe 2020: Reaping the
rewards of reform
26 November 2013
Euro Plus Monitor 2013:
from pain to gain
4 December 2013
Eurozone: Debunking the
deflation scare
13 January 2014
9 June 2014
Holger Schmieding
Chief Economist
+44 20 3207 7889
[email protected]
Chart 2: Real M1 and GDP: the post-Lehman gap
14
6
12
5
10
4
8
3
6
2
4
1
2
0
0
-1
5
9
4
8
3
7
Eurozone real M1, 3q fwd, lhs
GDP, rhs
2
-2
6
-2
Eurozone real M1, 3q fwd, lhs
-4
-6
Jan 92
-3
GDP, rhs
1
Jan 95
-4
Jan 95
Jan 98
Jan 01
Jan 04
Jan 07
Jan 10
Jan 13
Yoy change in %; real M1 deflated by consumer prices and advanced by 3
quarters, on right-hand scale, real GDP on left-hand scale. Source:
Eurostat, ECB, Berenberg calculations
5
Jan 98
Jan 01
Jan 04
Jan 07
Jan 10
Jan 13
Real M1 and real GDP, levels in trillion euros, chained 2000 prices; real
M1advanced by 3 quarters, on left-hand scale; real GDP on annualised basis,
right-hand scale. Source: Markit, Eurostat
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