Global Daily – Euro capex leads lending

by: Aline Schuiling , Peter de Bruin

140328-Global-Daily-Insight.pdf ()
  • Eurozone bank lending to companies moved down further in February …
  • … but this is not preventing fixed investment from recovering moderately
  • St. Louis President Bullard continues to add to hawkish Fed rhetoric,…
  • …while initial jobless claims data suggest labour market recovery is picking up steam

 Bank lending to eurozone companies falls…

Eurozone M3 growth rose to 1.3% in February, up from 1.2% in January. From a historical perspective the current dynamics in money growth are still very subdued. The rise in M3 growth in February was mainly due to somewhat higher growth in M1 (currency in circulation and overnight deposits) and a significant weakening of the pace of contraction in marketable instruments (particularly repurchase agreements). More interestingly, the counterparts of M3 showed that the year-on-year change in bank lending to non-financial companies (adjusted for sales and securitization) declined to -3.1% from -2.8% in February, while the monthly flow in these loans came in at EUR -13bn. Meanwhile, yoy growth in loans households (also adjusted) increased to 0.4% from 0.2%, while the monthly flow was EUR 7bn.



… not preventing growth in fixed investment

Despite the continued contraction in bank lending to non-financial companies, fixed investment has been growing on a quarterly basis since 2013 Q2. It expanded by 1.8% in total between 2013Q1 and 2013Q4, while the yoy growth rate increasing to 0.1% in Q4 from -5.3% in Q1. This has largely been driven by a rebound in corporate profitability since the end of 2012, with the gross operating surplus rising by 2.3% yoy in 2013Q3. Profitability has been supported by a considerable slowdown in wage growth (the rise in nominal hourly labour costs in the business sector slowed down from 2.2% yoy in 2012Q4 to 1.1% in 2013Q4) and increasing labour productivity growth. On top of that, corporate balance sheets have returned to good health and net financial assets of non-financial corporates has risen to historically high levels, while business confidence has largely shaken off the worries about the eurozone financial and sovereign crisis. Finally, borrowing costs for companies are being reduced by the low levels of interest rates. These positives point to a continued recovery in fixed investment, though admittedly tight bank lending conditions suggest it will be a relatively moderate upswing.

Fed’s St. Louis President adds to hawkish rhetoric,…

Meanwhile, Fed speakers continued to make headlines. Yesterday, James Bullard, who heads the St. Louis Fed, told investors during a conference in Hong Kong that he sees the Federal Funds rate at ‘normal levels’ in 2016, which means that rates would have to rise to around 4% in that year. This is substantially higher than the median FOMC forecast of 2.25% as the appropriate level of the federal funds rate for 2016. Moreover, during an earlier speech this week, Bullard backed Chairwoman Yellen’s six months remark, stating that that comment was not that different from what financial markets were expecting before the press conference. While Bullard clearly belongs to one of the hawks amongst the FOMC, we think that comments from various members will turn increasingly hawkish in coming months.

…but FOMC still underestimates strength of the recovery

This is because we think that FOMC members continue to underestimate the strength of the recovery. Indeed, initial jobless claims fell by 10K to 311K in the week ending March 22, the lowest level in four months. While the relationship between jobless claims and nonfarm payrolls has weakened a bit recently, in the past, claims in the vicinity of 300K have been consistent with hiring picking up to 350K a month. We therefore would not be surprised to see the labour market recovery gaining steam in coming months, and think that next week’s labour market report for March will show a considerable strengthening in job growth. Elsewhere, Q4 GDP growth was revised up by 2 tenths to 2.6%, primarily reflecting stronger consumption growth, while profits rose by 2.1% qoq (non-annualised), bringing the share of profits in GDP to 12.7%, the highest level since 1950Q4!