Wednesday, July 27, 2011
Today the ECB released details on monetary aggregates for the euro area. According to the statement on the asset side of the consolidated balance sheet of the euro area monetary financial institutions (MFIs):
the annual growth rate of total credit granted to euro area residents decreased to 2.6% in June 2011, from 3.1% in the previous month. The annual growth rate of credit extended to general government decreased to 4.6% in June, from 5.7% in May, while the annual growth rate of credit extended to the private sector decreased to 2.2% in June, from 2.5% in the previous monthWeak credit growth is entirely consistent with the deteriorating pace of the macroeconomy (see Edward Hugh's post here). How does 2.2% annual credit growth compare to history? Meager. Spanning 2005 to June 2011, loans to euro area households grew at an average 5.5% annual pace, while that to non-financial businesses marked an average rate of 6.8%. According to this indicator, the ECB need not be 'vigilant' at all.
Perhaps it's one country, like Germany? One country that will eventually challenge the stability of prices and the financial system. (Nope, not through loans to the private sector.)
To investigate the dynamics of lending across the euro area, I illustrate the stock of private sector credit for the euro area 12 ex Luxembourg in the series of charts below (the data is available here). Each chart plots the level of loans to households and non-profit institutions (HH) alongside the level of loans to non-financial corporations (NFC). HH loans are generally made to households for consumption or for house purchase. NFC loans can be made for any number of reasons, but typically for investment spending.
Of note, the Periphery economies are generally deleveraging, but to varying degrees. Ireland is clearly experiencing the biggest credit crunch among the PIIGS (Portugal, Ireland, Italy, Greece, and Spain). Also, note that any media report alluding to a German spending and investment boom is just wrong. Credit growth to HH and NFC is literally non-existent. France and the Netherlands are problematic - strong macroprudential regulation is likely needed in these countries while real rates remain low (or negative).
Enjoy viewing the charts - I did. (Click to enlarge)