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The latest monetary developments in the Eurozone showed that lending to businesses and households deteriorated again in May. In a context where the ECB looks on track to tighten further its monetary policy, the economy is likely to face a longer recession than expected.

According to the ECB, the annual growth rate of the broad monetary aggregate M3 decreased to 1.4% in May 2023 from 1.9% in April, averaging 1.9% in the three months up to May. In the meantime, the annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, was down 6.4% in May, compared with -5.2% in April. Taking into consideration inflation, real M1 — usually a leading indicator of GDP — declined by 12.5% YoY, pointing to a gloomy outlook for the coming months.

🇪🇺 On a YoY basis, real M1 figures (using data until May) suggest #Eurozone GDP will be under pressure in the coming quarters. pic.twitter.com/JpvjSdQneU

— Christophe Barraud🛢🐳 (@C_Barraud) June 28, 2023

In the meantime, data also revealed the annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitization, and notional cash pooling) decreased to 2.8% in May from 3.3% in April. Among the borrowing sectors, the annual growth rate of adjusted loans to households decreased to 2.1% in May from 2.5% in April, while the annual growth rate of adjusted loans to non-financial corporations decreased to 4.0% in May from 4.6% in April.

Looking at the most recent figures (6-month moving average annualized), the trend is worrying with credit to the private sector on the verge of contraction. Without surprise, lending for house purchases (households) is already falling, partly explaining home prices’ decline in several countries including Germany.

Euro Area - Credit to the private sector
6 months annualized % pic.twitter.com/Mbx56rK5Yl

— Nicolas Goetzmann (@NicolasGoetzman) June 28, 2023

Euro Area - Lending for house purchase (households)
May 2023

6 months annualized : -0.27%https://t.co/HJzkIQMfRX pic.twitter.com/08fz8rNTvH

— Nicolas Goetzmann (@NicolasGoetzman) June 28, 2023

🇩🇪 🇪🇺 German house prices fall by record 6.8% as higher mortgage costs deter buyers - FT
*First-quarter drop in Europe’s largest property market is biggest since index began in 2000https://t.co/P7r4sXZgKY pic.twitter.com/cAI2RdmO2o

— Christophe Barraud🛢🐳 (@C_Barraud) June 23, 2023

Meanwhile, there is a risk that several banks reduced lending further in the coming months as deposits’ outflows persisted in May.

🇪🇺 Total deposits' outflows continued in May (but at a faster pace than in April)https://t.co/zjJFbWfJmS pic.twitter.com/cnbh0AXIC6

— Christophe Barraud🛢🐳 (@C_Barraud) June 28, 2023

The key problem is that monetary developments in the Eurozone are unlikely to improve in the short term with ECB on track to raise rates and tighten further its balance sheet. At this stage, traders expect ECB to raise rates in July and September (probability of 65%). Separately, banks repaid a significant amount of TLTRO on Wednesday while, according to Bloomberg, “Some hawkish European Central Bank officials are pondering options to speed up the reduction of the institution’s €5 trillion ($5.5 trillion) stash of bonds“.

*Bottom line: Latest monetary developments in the Eurozone already point to a gloomy outlook for the coming months, particularly for the housing sector. Conditions are unlikely to improve soon in the context where ECB is likely to tighten further its monetary policy. As a result, the Eurozone economy is likely to face a longer recession than expected. It also means that the consensus of economists looks optimistic concerning Eurozone GDP forecasts for both 2023 (+0.6%e) and 2024 (+1.0%).

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