Positive thinking on Euroland

There are plenty of obvious reasons to be worried about what’s happening in Euroland. The Greek economy is in terrible shape and it looks as if the recession in Euroland worsened in the second half of 2012. Output contracted in the third quarter, and all reliable cyclical indicators point to a further, more substantial, fall in GDP in Q4. For Euroland as a whole, and the periphery in particular, the past four years are better described as a depression, rather than recession, and based on consensus forecasts for next year, there’s little meaningful change in the level of output compared to where it has been, let alone where it ‘should be’.

But there are also grounds for optimism, with tentative indications that the worst may have passed.

Thus, since the ECB announced its OMT programme in the summer, Euroland has experienced a relatively long period of financial calm, coincident indicators of growth have stabilised (albeit at recessionary levels) and a reliable leading indicator of growth – German Ifo expectations – appears to have passed a turning point.

Then today, the reported growth in Euroland M3, a measure of money supply, surprised positively with an increase of 3.9% year on year in October, as against the consensus forecast of growth of 2.8% year on year. On a monthly basis M3 rose 1.2%, and this is the fastest or highest growth rate since October 2008. M3 is a broad measure of money supply as identified in the table below and arguably for Euroland, it’s M1 that matters given that in the past increases in M1, in particular deposits, have served as a leading indicator of a possible upturn in lending growth.

	M1	M2	M3
Currency in circulation	X	X	X
Overnight deposits	X	X	X
Deposits with an agreed maturity up to 2 years		X	X
Deposits redeemable at a period of notice up to 3 months		X	X
Repurchase agreements			X
Money market fund (MMF) shares/units			X
Debt securities up to 2 years			X

And digging into the details, the M1 data confirmed continued stabilization in deposit growth in the periphery. Lending growth did remain weak at -0.7%yoy but this was up slightly against the -0.9%yoy rate in September, albeit that this was mainly due to a pick-up in lending to governments rather than to the private sector.

In thinking about growth we need to see trends developing and the very recent data add to a string of upside surprises in the Euroland numbers, which taken as a whole suggest that while activity levels are very weak, it is possible that, after a relatively weak fourth quarter, growth could improve – and turn marginally positive – in the new year.

James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla