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●   Have money, will spend: Major changes in real M1 money supply tend to predict cyclical turning points in the Eurozone two to three quarters in advance. If households and companies raise their liquid balances strongly, as they usually do in a downturn with some help from the central bank, they will start to spend a good part of it a little later.

●   The lockdown exception: For most of last year, real M1 growth pointed to firmer gains in real GDP for late 2019 and 2020. After the easing of trade tensions last December, the rebound in aggregate demand started to unfold in January and February this year – until the COVID-19 virus struck Europe in late February. The serious lockdowns imposed step-by-step from 10 March onwards have taken a heavy toll on supply and demand. Never before has economic activity been so much weaker than prior monetary dynamics would have suggested (see chart).

●   Mind the gap: In a crisis-driven dash for cash, real M1 growth accelerated to 9.5% yoy in March. The closure of shops, preventing consumers from spending money as usual, probably contributed to it. As companies drew down credit lines, bank lending to non-financial companies rose to 5.4% yoy in March from 3.0% in February. In the near term, the gap between money supply and economic activity will likely widen even more. Fearful households and companies look set to raise their liquid balances further, boosting real M1 growth in the process. Heading the opposite way, real GDP could fall by 11% qoq and 14% yoy in Q2 after a very weak March had dragged Q1 GDP down by 3.8% qoq. Such GDP data for Q2 would go well beyond the scale of our chart.

●   Lockdowns are working: The spread of the virus has slowed sharply in most countries, in Greece, Austria, Germany and Italy even more so than in France, Spain and the UK. This nourishes the hope that the pandemic will remain manageable after the cautious easing of restrictions by more and more countries that started in Austria two weeks ago, followed by Germany on 20 April. But the risk of a second wave of infections that could be severe enough to trigger new restrictions and prolong the recession still clouds the outlook. Infections data next week will provide first clues.

●   The need to keep it up: Policy makers and regulators need to remain in “whatever it takes“ mode to prevent a potentially crippling credit crunch once companies have exhausted their credit lines. According to the European Central Bank’s bank lending survey for Q1, banks tightened their credit standards by less than they had in the financial crisis of 2008/2009. While it is still very early days, we view this as an encouraging sign.

●   Enough money to finance the rebound: Unlike previous downturns, the current recession is caused almost solely by a non-economic factor. The evolution of the pandemic will determine when and how fast supply can be switched on. Household and corporate demand will initially lag behind. But the money supply data show that many of them would have the means to step up spending again. They may need a good nudge from fiscal policy to do so. On balance, the money and credit data support our call for a tick-shaped recovery in activity starting – hopefully – in May already.

Holger Schmieding

Chief Economist

+44 20 3207 7889

holger.schmieding@berenberg.com

Kallum Pickering

Senior Economist

+44 20 3465 2672

kallum.pickering@berenberg.com

Florian Hense

European Economist

+4420 3207 7859

florian.hense@berenberg.com

Disclosures

This material is intended as commentary on political, economic or market conditions for institutional investors or market professionals only and does not constitute a financial analysis or a research report as defined by applicable regulation. See the "Disclaimers" section of this report.

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