We have focused a lot on the plethora of economic data out of the US as well as the sovereign risk crisis in the Euro-area, but not a lot on the detailed economic data out of the Euro-area.
In exploring the latest Euro-area economic information in more detail for last week’s roadshow, one economic relationship that caught my attention is Euro-area GDP growth versus the growth in M1 money supply (shifted 4 quarters) – see chart attached. This relationship points to a very sharp slowdown in Euro-area GDP growth given the sharp fall-off in the growth of money supply. The sharp slowdown in money supply mostly reflects the current real decline in Euro-area bank lending.
Clearly, Euro-area growth has been under enormous strain with some countries, such as Greece, struggling to emerge from the recession. In contrast, Germany has been performing well (Q1 2011 GDP growth of 5.5%q/q) but slowed sharply in Q2 2011.
The slowdown in Q2 seems to have originated from higher energy prices and Japan-related disruptions, but the slow response from European leaders to the debt turmoil combined with fresh concerns over the health of the US economy, have contributed to worsen the outlook; especially a dampening of domestic economic activity.
Growth rates for the Euro-area have been revised lower and are currently barely positive for H2 2011. This compounds the current economic weakness in the US (US GDP growth rates have been systematically downgraded during 2011).
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