European M1 signalling recession


As my readers would be well aware I have been watching Europe for well over a year and providing near-daily commentary on the economic events that are occurring across the continent. One of the things I have been watching over the last few months is the monetary aggregates. I noticed that the ECB had provided an update for July today and it seems to confirm, assuming previous trends hold, that Europe is headed for, or is already in, recession.

The Eurozone’s narrow money (M1) trends continue to weaken, signalling that the slowdown in economic growth is going to continue. M3 is still growing slowly, but you can see from the chart below that it tends to be a trailing indicator. Narrow money, M1, has been a much better economic leading indicator historically; it contracted in real terms ahead of the last recession, while M3 was still growing solidly at that time.

In real terms M1 growth turned negative in the last quarter and continues to fall, it is now lower than during the tech wreck and on its way to hit GFC lows, but given the state of the European Union this probably is not too much of a surprise.


I also noted this morning that reuters has a very gloomy assessment of the German economy’s future which seems to be supported by the chart above:

German consumers’ reluctance to spend and a U-turn on nuclear power weighed on GDP in the second quarter while export orders fell sharply in August, leaving

Europe’s top economy braced for an extended period of slow growth by year-end at the latest. Quarterly economic growth slowed to 0.1 percent in April-June, data from the statistics office showed on Thursday, confirming preliminary figures that dented hopes Europe’s top economy will continue to underpin the region’s fragile recovery.

Adding to evidence the outlook is darkening for German growth, manufacturing activity in the export-geared economy expanded at its slowest pace in almost two years in August, separate PMI data showed. The euro fell following the purchasing managers index figures, which dropped for the fourth month running, and analysts said an increasingly uncertain global outlook meant a longer-term growth slowdown for Germany was very much on the

“We must get used to the idea of a weak second half. Germany is still dependent on exports,” said Torge Middendorf at WestLB. Andreas Rees, analyst at Unicredit, said special factors such as Berlin’s decision to scrap nuclear power and a drop in construction spending meant the second quarter growth picture was excessively gloomy, and growth should rebound in the third.

“After that, however, the German economy will enter a more difficult phase because the momentum from exports will probably ease noticeably,” he said.

Maybe that is good news in the “bad is good” world.