Eurozone narrow money supply growth reaches 19-month low in July

Money supply growth in the euro area slowed to its lowest pace in 19 months in July, reflecting slower economic activity, leaving economists somewhat divided on the outlook for trends in lending.

So-called "narrow" money supply (M1) growth slowed from the 8.7% year-on-year pace observed in June to 8.4% in July, according to the European Central Bank.

In part, that was the result of a shift towards less liquid money balances (M2), which has traditionally been a good indicator for lower domestic demand growth in the Eurozone, Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics said in a research note sent to clients.

The annual rate of growth in the broadest measure of money supply, denominated M3, on the other hand slipped from 5.0% to 4.8% (consensus: 5.0%).

However, the credit cycle improved further, Vistesen said, as seen in the rate of loan growth to non-financial firms, which picked up from 1.7% to 1.9%.

"This suggests that new loans to SME sector is accelerating, but total lending is improving at a much slower pace, especially in the periphery, as NPLs roll off without being renewed," Vistesen said.

The rate of growth for credit to the private sector stood at 1.4% in July, down from 1.5% in the month before.

Capital Economics's Jack Allen was less sanguine, pointing to the still "large" gap between lending in the likes of France and Germany and the Eurozone periphery, with lending in Italy shrinking at an accelerated rate in Italy over recent months.

Banking risks in peripheral economies, especially Italy, remained "large", Allen argued, adding that those risks would rise if economic growth in the currency-bloc slowed.