According to the ECB, “the annual growth rate of the broad monetary aggregate M3 decreased to -0.4% in July 2023 from 0.6% in June, averaging 0.4% in the three months up to July“. In addition, “the annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, was -9.2% in July, compared with -8.0% in June“. Taking into consideration inflation, real M1 — usually a leading indicator of GDP — declined by 14.5% YoY in July, pointing to a gloomy outlook for the coming months.

In the meantime, data also revealed “the annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitisation and notional cash pooling) decreased to 1.6% in July from 2.0% in June. Among the borrowing sectors, the annual growth rate of adjusted loans to households decreased to 1.3% in July from 1.7% in June, while the annual growth rate of adjusted loans to non-financial corporations decreased to 2.2% in July from 3.0% in June.“

Looking at most recent figures (6-month annualized), the trend is even worse with credit to the private sector flirting with 0%. Without surprise, lending for house purchase (households) dropped at a faster pace, partly explaining home prices’ decline in several countries including Germany.

The key problem is that monetary developments in the Eurozone are unlikely to improve in the short term with ECB on track to tighten further its balance sheet and potentially raise rates once again before year-end. It came as Eurozone demand for loans among firms has plummeted to an unprecedented low. According to a survey by the European Central Bank (ECB), big banks reported a substantial drop in net demand for loans during the second quarter of 2023, marking the lowest level since the survey’s inception in 2003.In addition, several indicators suggest economic activity is already under pressure with Eurozone PMI composite contracting for a third straight month in August and reaching a 33-month low.

*Bottom line: Latest monetary developments in the Eurozone already point to a gloomy outlook for the coming months, particularly for the housing sector. Conditions are unlikely to improve soon in a context where ECB is likely to tighten further its monetary policy and the full effects of previous moves are yet to be realized in the broader economy. As a result, the economic activity is likely to deteriorate further, raising risks of a recession.