The Eurozone recovery remains stuck in the slow lane of
recovery. Weak money supply growth is not only condemning the Eurozone to stagnant
recovery, but it is raising the odds that the single-currency area could easily
slip back into recession again. The latest M3 money supply growth rate running
at a meagre 1.2% is far too low to support the vibrant recovery that Eurozone
policymakers are desperately hoping for. Even with official interest rates as
low as 0.25%, the ECB will fail to generate any meaningful stimulus until
cheaper funding reaches the parts of the economy who urgently need it –
Eurozone households and companies. It is not just money supply growth slowing
to a crawl, bank lending remains in negative territory after years of
contraction. Consumer credit and corporate borrowing both continue to contract
at an underlying -3% annual rate. The economy cannot operate like this much
longer. Eurozone consumers and businesses are not getting any real benefit of
wafer thin interest rates. It is down to lack of supply and lack of demand.
Tougher capital adequacy rules are constraining the banks’ ability to lend.
Meanwhile, the fragile economic picture, weak confidence and high unemployment
cast very long shadows over the demand for credit. The ECB still needs to think
outside the box to get the Eurozone motoring into the fast-lane. A change of
heart on quantitative easing still beckons ahead.
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