Euro area money supply growth suggests even more inflation lies ahead

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by Shaun Richards

As we arrive at the end of the week the focus has switched to the Euro area and European Central Bank.Whilst as we noted yesterday neither the US nor Canada raised interest-rates they set out their stall for March. We can look at this via the response of former ECB Vice President Vitor Constancio.

The present oil price spike may not last, and the economy is already decelerating. The IMF just reduced the US growth forecast for this year by 120 basis points, invoking the elimination of the Build Back Better package. Fiscal and monetary policies are restrictive in 2022/3

As you can see the concept of a series of interest-rate increases seems to have got under his skin. Apparently economic growth as below and CPI inflation of 7% is not enough.

Real gross domestic product (GDP) increased at an annual rate of 6.9 percent in the fourth quarter of 2021, following an increase of 2.3 percent in the third quarter. ( US BEA)

As the US had already regained its pre crisis GDP level in the third quarter it has now pushed ahead. We also got another signal of the inflationary pressure in the system.

The price index for gross domestic purchases increased6.9 percent in the fourth quarter, compared
with an increase of 5.6 percent in the third quarter. The PCE price index increased 6.5 percent,
compared with an increase of 5.3 percent.

But look what out former Vice-President concludes.

I believe that growth and inflation numbers going forward will stop the FED from doing the 5 to 7 rate hikes being mentioned. Btw, against the chattering, I also believe the ECB doesn’t have to (and won’t) follow the FED rate hikes this year. Bond yields will suffer contagion.

I have some sympathy with the view about how many rate hikes there will actually be but the real reason for the tweet storm is to reinforce the view that the ECB will not raise interest-rates. He omits to point out that its negative interest-rate policy is singing along with Elvis.

We’re caught in a trap
I can’t walk out
Because I love you too much, baby

Economic Growth

This turns out on today’s evidence to be a case of the good, the bad and the ugly. So let’s start with the good which is la belle France.

Gross domestic product (GDP) grew at a more moderate pace in Q4 2021 (+0.7% after +3.1%) after the strong increase recorded in Q3 with the reopenings in several sectors of activity. After returning to its pre-crisis level in the previous quarter (+0.2% compared to Q4 2019), GDP exceeded it significantly in Q4 (+0.9% compared to Q4 2019).

So growth in the fourth quarter meaning the economy is putting clear blue water between it and pre pandemic levels. We should not perhaps be surprised at the French economy responding well to more state intervention with government consumption expenditure up by 4.1% on the quarter.

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The bad ( and this will presumably be going down rather well in Paris as well as other places) is represented by Germany.

WIESBADEN – The gross domestic product (GDP) fell by 0.7% in the fourth quarter of 2021 compared to the third quarter of 2021 – adjusted for price, seasonal and calendar effects…….Private consumption in particular decreased in the fourth quarter of 2021 compared to the previous quarter, while government consumer spending increased. Construction investments fell compared to the third quarter of 2021.

So the decline we feared and this means that the pandemic picture now looks like this.

Compared to the fourth quarter of 2019, the quarter before the start of the Corona crisis, GDP in the fourth quarter of 2021 was still 1.5% lower (price, seasonally and calendar adjusted).

In fact we can go further because the economy of Germany was in the slow lane before all this began. We also got a reminder of the inflation problem.

WIESBADEN – In December 2021, import prices were 24.0% higher than in December 2020. As the Federal Statistical Office (Destatis) also reports, the rate of change compared to the previous year was +24.7% in November 2021 and in October 2021 by 24.7% +21.7%.

There was some relief in the monthly increase only being 0.1% but prices 24% higher than a year before provides quite a context.

At first you may be wondering why Spain is in the ugly camp.

The Spanish GDP registered a variation of 2.0% in the fourth quarter of 2021 compared to to the previous quarter in terms of volume.
• The year-on-year change in GDP stands at 5.2%, compared to 3.4% in the quarter preceding.
• For the whole of 2021, GDP at current prices stands at 1,202,994 million euros, 7.2% higher than in 2020. In terms of volume, the GDP registered a variation of 5.0%.

The ugly bit seems to be missing from the official release and it comes from the fact that GDP is still around 4% below pre pandemic levels.

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Money Supply

We can return to our ECB theme as we see how it has responded to the rise in inflation.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 9.8% in December from 10.0% in November.

So at the aggregate which most reflects central bank moves we see that the beat goes on.In fact if we look at the monthly rise of 104 billion Euros we see that it is double November’s level. So the impression of a slowing changes somewhat.

Oh and as an aside we see a lot of rhetoric about cash being in decline whereas the last 3 months have seen rises of 8 billion Euros twice and now 5 billion. So slower growth than electronic money but still fast growth.

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For our purposes today the more relevant number is below because it represents what we can expect from nominal GDP growth.

The annual growth rate of the broad monetary aggregate M3 decreased to 6.9% in December 2021 from 7.4% in November, averaging 7.3% in the three months up to December.

So if we round that to say 7% we see that if we think economic growth prospects are 2% ( I am being generous as I look further ahead) then we have an inflationary push of the order of 5% and that is the problem.


The idea of interest-rate rises seems to set the cat amongst the pigeons at the ECB. This to my mind simply confirms that it is afraid of the consequences should it do so, which suggests that negative interest-rates are here to stay. We can look at the other side of the argument from Elga Bartsch of Blackrock in the Financial Times.

But the reapplication of the EU’s deficit rules under Stability and Growth Pact again next year would reintroduce excessively tight fiscal policy. This would raise questions about the level of stimulus that can be provided by the ECB.

To my mind the problem here is the apparent assumption that the ECB needs to provide ever more stimulus. Then the excuses start.

Parallels have been drawn with the measures taken by the Bundesbank in the early 1990s, when Europe last experienced inflation this high. Such comparisons overlook that the inflation drivers are completely different today. Instead of exuberant demand in the wake of German reunification, today’s inflation is mostly due to supply constraints amid the post-pandemic activity restart.

As to the second sentence below I can only say, Really?

Exactly how long the current inflation surge will last is difficult to predict, especially in the light of rising geopolitical risks concerning the Russia-Ukraine conflict. Fortunately, the ins and outs of the near-term inflation dynamics are not the key point in the policy debate.

You also end up preferring theory and models over reality.

And with inflation expectations remaining anchored below, the ECB can afford to look past energy price spikes.

Oh and even more stimulus.

The Next Generation EU programme is an important step towards a collective fiscal response. But European governments cannot afford to stand still on national fiscal policies either.

As Andrea True Connection put it.

More, more, more
How do you like it? How do you like it?
More, more, more
How do you like it? How do you like it?
More, more, more
How do you like it? How do you like it?

So more fiscal stimulus presumably financed by the ECB which means even the optimists see it being in the same trap.


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