The European Central Bank reported that money supply growth (M3) in the euro area decelerated further in October, dropping to an annual rate of 1.4% – the slowest pace of increase in two years – well below the ECB’s 4.5% reference target. The flow of credit to the private sector dropped by 1.7% yoy (adjusted for securitization and sales), down from 1.6% in September.
While the credit impulse to households remains low but positive (0.1% yoy), the fall of credit to corporates (-3.7% yoy) confirms that we are heading towards a creditless recovery, where investment will not be an engine of growth. Of note, the picture is once again one of fragmentation. While the French corporate sector proved rather resilient to credit crunch, the total amount of loans to corporates plunged by 5.7% yoy in Italy, 6.6% in Portugal, and 19.3% in Spain.
Buzzzz, wrong. In a Keynesian world there is no such thing as a creditless recovery: something Goldman's operative in the ECB knows well, and why the ECB may truly use the nuclear option, and opt for negative deposit rates probably after a conditional LTRO or another 15 bps repo rate cut, but potentially as soon in the next month or two, as it has tried everything else, aside from outright QE, which however would mostly benefit Germany's asset holders and do nothing to stimulate credit growth (see the US for 5 years worth of proof).
As for the European fragmentation in the loan creation department, our condolences to Spain because no amount of employment data falsification or Rajoy propaganda can undo the devastation left from an ongoing 20% crash in credit creation.
And the punchline:
In conclusion, even SocGen is now pessimistic that anything the ECB does will have much of an impact on the credit implosion that is Europe: "Yet, it is not clear to us how a movement in overnight deposits would be such as to stimulate investment. What we rather see is that the flow of credit remains negative, which suggests that the strong recovery in investment everyone expects is unlikely to happen for, at least, six to nine more months."