Euro area: The highest loan flow to non-financial corporations since 2011

Euro-area M3 money supply increased 4.0% y/y in February after rising 3.7% y/y in January (revised down from 4.1% y/y). This is the highest rate of increase since April 2009.

Growth in M1 money supply was also higher at 9.1% y/y in February from 8.9% y/y in January. In real terms it is a good leading indicator for economic activity and it continues to point to GDP growth around 0.7% q/q mid-2015. The signal is stronger than our above-consensus forecast and we continue to see upside risk to our GDP growth forecast of 1.6% in 2015.

Loans to the private sector improved further and increased 0.6% y/y in February up from 0.4% y/y in January. In December last year it turned positive for the first time since mid-2012 (please note that the figures are adjusted for sales and securitisation).

The progress in lending to the private sector was mainly driven by loans to nonfinancial corporations, which declined at the slowest pace since mid-2012. Considering the monthly loan flow, which has trended higher since mid-2013, there was an increase of EUR11bn in February after a small decline in January. The three month moving average in loan flows to non-financial corporations is the highest since end-2011.

Overall, the figures confirm our view that the euro-area recovery is on track and the improvement in lending to non-financial corporations is important for GDP growth to gain further momentum.

It will be interesting to see how much of the liquidity from the ECB’s QE purchases will feed through to more credit to the private sector. The liquidity from the old 3Y LTRO did not boost lending but it is now reported that there is demand for credit and loans both from households and enterprises, while banks’ supply conditions have improved after the ECB’s Asset Quality review and stress tests. Hence, we expect lending to continue to improve and support the recovery.