Eurozone piles economic hazards; Money supply drops, first since 2010

By Al Mayadeen English
Source: Agencies
28 Aug 2023 16:00

Europe's central bank says that July numbers revealed that money supply in the EU dropped to 0.4 percent in July.

A man with an umbrella walks past the euro currency sign in front of the former European Central Bank (ECB) building, Frankfurt am Main, Germany on July 27, 2023. (AFP)

Europe slipped into its latest economic red zone as data revealed that the money supply shrunk for the first time since 2010 due to falling private sector lending and declining deposits.

The European Central Bank follows money supply as one of the main metrics to monitor market reaction to financial policy tightening. The newest figures indicate the economy is likely to slow down while inflation is expected to cool.

Despite forecasts of inflation ease, the 5.3 percent inflation rate recorded in July remains well above the ECB's 2 percent target. Economic experts argued that the interest decision during the next ECB meeting is a “coin toss” that could be decided based on August inflation data set to be released this Thursday.

The central bank said on Monday that monetary supply in the Eurozone decreased 0.4 percent since the beginning of 2023 to July, down from June's 0.6 percent.

“On the asset side of banks’ balance sheets . . . things look bad as credit growth collapsed for corporates and especially for households,” Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, said on X.

This was “a feature, not a bug, of monetary policy” and it meant “the ECB can [should] stop hiking soon”.

The Eurozone officially announced in June that it had entered a recession after two consecutive quarters of GDP decline.

The main driver behind the EU's first money supply drop since 2010 was a decline in lending growth of the private sector to 1.6 percent in July. Lending to governments also fell by 2.7 percent, the biggest downtrend in 16 years since 2007.

“Annual growth in bank lending continues to trend down rapidly,” said Bert Colijn, Senior Economist at Dutch bank ING. “This has been driven by strong declines in business sector borrowing and a steady downward trend in household borrowing — which is mainly for mortgages.”

“With economic activity already in stagnation mode at the moment, monetary policy is set to contribute to a weak economic environment for the quarters ahead,” said Colijn.