Euro area money supply growth data for May are a 'red alert', economist says

Lending to companies in the euro area picked up heartily last month, but for some economists the ongoing decline in so-called 'narrow money' was a "red flag" heralding a big drop in loans to the private sector over the next six to nine months.

According to the European Central Bank, the annual rate of growth in the M3 monetary aggregate slowed from 6.1% for April to 5.6% in May (consensus: 5.8%).

Within that, growth in the narrow money aggregate, also known as M1, which encompasses currency in circulation and overnight deposits, slowed from 8.2% to 7.8%.

Commenting on the data, Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics, said the differential between M1 growth and "soaring" inflation added to his "conviction that GDP growth in the EZ will slow sharply in the next six-to-nine months."

On the other hand, the rate of growth in loans extended to non-financial firms, which are tallied on the other side of the ledger of the currency bloc's consolidated balance sheet, jumped by 0.6 percentage points to 5.8%.

"These are robust numbers for lending to the private sector, but they won’t last. Given the slowdown in narrow money, we should expect a significant drop in loan growth to the private sector in the next six-to-nine months."