Is Eurozone inflation really that weak, mr. Draghi?

Eurozone headline inflation crept back up to 0.0%YoY in October, from -0.1%YoY last month. Oil continues to keep a lid on inflation. Today’s Eurostat flash estimate also shows core inflation at 1.0% (from 0.9% last month). Services inflation, the best gauge of domestically generated inflation pressures available at this stage, increased 0.1%-point to 1.3%YoY.

Inflation and components

Today’s inflation figures are the first indication of price developments after Draghi last week worried about the “strength and persistence of the factors that are currently slowing the return of inflation to levels below, but close to, 2%”. These worries were his main justification for effectively pre-announcing more monetary fireworks in December.

But it is hard to find justification for the ECB’s apparently increasing worries in today’s inflation figures. Aside from headline inflation, which this year has been driven primarily by oil, services inflation has been moving sideways this year. Core inflation has even crept up rather than down, now trending around 0.9% versus 0.7% a year ago.

To be fair, Draghi’s worries concern the medium term. But even then, it is hard to escape the notion that inflation was merely an excuse to talk down the euro exchange rate last week. The Eurozone is adding jobs at a decent pace and wage growth in the first half of the year reached 1.8%YoY, suggesting that core inflation will trend up rather than down in the medium term.

Draghi’s inflation anxiety seems even more odd given his own comment, made in June 2013, that low inflation “is not, by itself, bad; with low inflation, you can buy more stuff”. This certainly applies today: with healthy Eurozone nominal wage growth and inflation around zero, real wage growth is now higher than in the run-up to 2008. The strength of Eurozone domestic demand is therefore in no small part attributable to the current low inflation environment.

Looking ahead, we expect inflation to remain around current levels for another month or two. After that, energy will become a less important factor for headline inflation due to ‘base effects’ (consumer energy prices started their steep decent last December). That should cause headline inflation to quickly recover to between 0.5% and 1.0%YoY, weakening somewhat the tailwind for household consumption.

Is Eurozone business borrowing faltering already?

Bank lending to Eurozone businesses fell back in September to 0.1%YoY, down from 0.4%YoY in August (net bank lending adjusted for sales and securitisation). This is disappointing: business borrowing had just turned positive a few months ago after three years of deleveraging. The weakening of business borrowing growth seems at odds with the continuing positive signals sent by soft indicators such as PMIs and last week’s Bank Lending Survey, where banks reported increasing demand for business loans. Chances are therefore that we are looking at a blip, and an upward trend will resume shortly.

In any case, the failure of bank business lending to accelerate looks less bad if one takes into account that bond issuance has been resilient this year. Taking bank lending and bond issuance together, the credit flow to non-financial business turned positive at the start of this year and remains on an upward trend:

Bank lending to households continued to accelerate. Low rates, solid consumer confidence and housing optimism underpin mortgage lending in many Eurozone countries. That said, credit developments continue to diverge markedly between countries. France and Belgium are seeing solid credit growth to both businesses and households. Developments in Germany are more moderate, although bank lending to households is gathering momentum. Net bank lending in the Netherlands is still negative, although housing optimism has returned (the strongly negative reading in business borrowing is almost certainly a glitch as this series is rather volatile month-on-month in the Netherlands). In Portugal, Spain and Ireland, deleveraging is still in full swing. In Italy however, deleveraging is slowly drawing to a close.

EZ credit growth by country

Meanwhile, M1-growth is holding well at over 11%YoY. M1 is one of the best leading indicators of the Eurozone business cycle, and its ongoing strength suggests that current consumption growth could well extend in the quarters ahead:

M1 and GDP

Overall, this M3-report shows a slowly but steadily improving credit environment in the Eurozone. The faltering of bank credit to non-financial business is an important dissonant however, one not (yet) mirrored in other indicators. This may be a glitch, so we’ll be closely watching next month. In any case, it seems difficult to point at this report, with its strong M1-growth, as convincing justification for further monetary easing in December. For that, ECB-president Draghi will have to look elsewhere.

Ons geldstelsel: krediet is belangrijker dan geld

Vandaag vond in de Tweede Kamer een Rondetafelgesprek plaats over het geldstelsel. Dit is een uitvloeisel van het succesvolle Burgerinitiatief Ons Geld. De deelnemers, agenda en schriftelijke inbreng van alle deelnemers zijn hier te vinden.

Hieronder mijn inbreng (schriftelijk en op video). Mijn belangrijkste kritiekpunt is dat de focus op geld eraan voorbij gaat dat krediet de belangrijkste drijver in het financiële systeem is, met geld als bijproduct. Om het financiële stelsel minder bubbelgevoelig te maken, is een directe focus op krediet in het economisch, monetair en toezichtsbeleid naar mijn mening effectiever dan het reguleren van geldschepping:

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Het volledige videoverslag is via deze link te zien. Hieronder mijn bijdrage: